Nearly every parent has heard the question from a child on a long road trip: "Are we there yet?" Similarly, many investors have wondered over the last year or so if the S&P 500 was in a new bull market yet. We now have an official answer after the index reached a new all-time high: Yes, the S&P is in a new bull market.
Although the ebbs and flows of the market aren't the most important things investors should pay attention to, many might be wondering what they should do now. Here's one idea to consider: It might be time to buy this magnificent exchange-traded fund (ETF) hand over fist.
An often overlooked gem
Vanguard is one of the biggest fund managers in the world. Six of its ETFs rank among the top 10 largest based on assets under management. The Vanguard Small-Cap Value ETF (VBR 0.37%) isn't one of them, but I wouldn't go so far as saying that it's a hidden gem. The ETF had over $52 billion in net assets as of the end of 2023.
However, I think that it is an often overlooked gem.
As its name indicates, the Vanguard Small-Cap Value ETF focuses on U.S. small-cap value stocks. It currently owns 856 stocks with an average price-to-earnings (P/E) ratio of 12.6. By comparison, the P/E of the average S&P 500 stock is 21.5.
Like most Vanguard funds, this one has a low expense ratio (only 0.07%, while the average expense ratio of similar funds is 1.13%). Its managers don't have to analyze which stocks to buy. They simply follow the lead of the CRSP U.S. Small-Cap Value Index.
Why load up on Vanguard Small-Cap Value ETF now?
One key reason why many investors have overlooked this ETF in recent years is that it hasn't performed as well as the S&P 500. However, I think that creates a great buying opportunity.
VBR Total Return Level data by YCharts
Small-cap value stocks are now dirt cheap -- and not just relative to the S&P 500 (although that's certainly the case). American Century Investments performed an analysis that concluded that small-cap stocks overall are trading roughly 17% below their average forward earnings multiples. I don't expect this significant discount to last much longer.
Smaller companies tend to be more sensitive to interest rates than larger companies. The abrupt and steep interest rate hikes in 2022, therefore, hit small-cap stocks especially hard. However, the Federal Reserve now expects to lower interest rates in 2024. These rate cuts will likely provide solid catalysts for small-cap stocks and, by extension, the Vanguard Small-Cap Value ETF.
Also, with the S&P 500 officially in a new bull market, the valuations of large-cap stocks could become even more frothy. I suspect that this could prompt many investors to turn to small-cap stocks with attractive valuations. Again, this scenario would directly benefit this ETF.
Time is on your side
Of course, it's possible that the Fed won't cut rates as expected. Investors could continue to flock to large-cap stocks instead of small-cap stocks. The Vanguard Small-Cap Value ETF wouldn't perform as well in this scenario.
However, I firmly believe that time is on your side with this ETF. Over the long term, small-cap stocks have delivered greater returns than large-cap stocks. Likewise, value stocks have outperformed growth stocks.
Perhaps this long-term trend won't resume in 2024. But I think, as parents have been telling kids for decades, "We'll get there soon."
