A bull market in U.S. stocks might be a lot closer than you think. The core reason is that the Federal Reserve's interest rate hikes, combined with the end to China's zero-COVID policy, could bring global supply and demand curves back into equilibrium in the second half of 2023.
Which investing vehicle is best positioned to take advantage of a hypothetical bull market? If you aren't keen on poring over financial filings and balance sheets, individual stocks probably aren't a good choice for you. As an alternative, exchange-traded funds (ETFs) might be more suitable to your investing style.
Image source: Getty Images.
ETFs are a basket of securities that trade on exchanges in a manner similar to individual stocks. These equities can be designed to track benchmark stock indexes, an economic sector, a commodity, or a particular investing strategy.
They usually offer an instant form of diversification through ownership stakes in a wide variety of equities, and they typically come with lower expense ratios than mutual funds.
Which ETFs are the most attractive buys right now? While there are plenty of choices, my view is that the Vanguard Small-Cap Index Fund (VB 0.65%), Vanguard Growth Index Fund (VUG 2.06%), and Technology Select Sector SPDR Fund (XLK 1.48%) are uniquely positioned to benefit from a marketwide upswing. Read on to find out more about these top-shelf ETFs.
1. Vanguard Small-Cap Index Fund
Small-cap stocks were some of the hardest-hit equities during the 2022 bear market. Shares of smaller companies faltered last year in response to the Federal Reserve's aggressive rate hiking policy.
Higher interest rates make it harder for early commercial-stage companies to expand and grow market share. With the Federal Reserve widely expected to hit a peak rate at some point this year, and a rate cut becoming a real possibility in late 2024, this risk factor could begin to fade from view soon.
The Vanguard Small-Cap Index Fund is a great choice to capitalize on a potential rebound in this asset class. This fund has ownership stakes in a wide variety of small-cap U.S. companies, it is passively managed, and it comes with an ultra-low expense ratio of 0.05%.
By comparison, the fund's peer group has an average expensive ratio of 0.98%. At the time of this writing, the Vanguard Small-Cap Index Fund has tracked higher by a respectable 7.7% so far this year.
2. Vanguard Growth Index Fund
The Vanguard Growth Index Fund tracks the performance of the CRSP U.S. Large-Cap Growth Index. The fund owns shares in 253 large-cap companies with an average price-to-earnings ratio of 29.4.
Its expense ratio of 0.04% is markedly lower than the average within its peer group (0.95%). In 2022, the Vanguard Growth Index Fund lost a staggering 33.5% of its value. This year, the fund has been in rebound mode, with its equity gaining nearly 8% at the time of this writing.
Why is the Vanguard Growth Index Fund worth buying now? The fund's upward momentum is no mistake. Growth equities arguably fell too far last year based on the fact that consumer demand has remained strong amid hot inflation and rising interest rates.
So, with these key headwinds quite possibly on the back end of their life cycle, this growth-centered ETF ought to continue to melt upward.
3. Technology Select Sector SPDR Fund
The tech sector turned in a forgettable performance in 2022. Shares of industry giants in software, hardware, IT services, and the like slumped last year due to concerns over consumer demand in a high-inflation environment.
Global supply chain kinks didn't help matters, either. As a result of these headwinds, the bellwhether Technology Select Sector SPDR Fund (XLK 1.48%) shed a whopping 28.4% of its value in 2022.
With the change in the calendar year, however, the Technology Select Sector SPDR Fund has found better fortunes in 2023. The fund's equity price has risen by almost 9% during the first two months of the year. Fortunately, this upward trend should hold up over the balance of 2023.
The bottom line is that this closely watched tech ETF has generated market-crushing returns for stakeholders over the balance of its existence. So, once global equity markets normalize, this tech-oriented ETF ought to get back to its winning ways, especially with its bargain-basement expense ratio of 0.10%.
