The stock market's rebound from the 2022 bear market has been impressive. Since the September 2022 lows, the S&P 500 has produced a staggering 44% total return, and all three major benchmark indices have recently reached fresh all-time highs.
However, that doesn't mean that the entire stock market is expensive. If you're looking to put money to work in passive ETFs, here are three that still look extremely attractive today.
Leveling the S&P 500 playing field
As mentioned, the S&P 500 has rebounded by about 44% from its 2022 lows. However, the largest stocks in the market have made up a disproportionate amount of these gains. Nvidia is up by more than 600% since then, Meta Platforms has gained 264%, and both Microsoft and Amazon have outperformed the S&P 500, as well.
If you exclude the effects of the big tech companies, the S&P 500's performance looks much different. While the market has certainly rebounded, if all the S&P 500 components were weighted equally, the index would be just 27% off the low. Over the long term, the equal-weight S&P 500 has outperformed the weighted version that we typically see in the headlines, so now could be a good time to buy the Invesco S&P 500 Equal Weight ETF (RSP 0.05%).
Dividend stocks have been hit hard by rates
A rising-rate environment is generally a negative catalyst for high-dividend stocks. The general idea is that when interest rates on risk-free instruments (like Treasury bills) increase, yields from income stocks increase, as well. Since yield and share price have an inverse relationship, rising rates tend to pressure the stock prices of dividend-paying companies.
We can see this in the performance. While the S&P 500 has gained nearly 44% from the lows, the Vanguard High Dividend Yield ETF (VYM -0.20%) has only gained about 27%.
On the other hand, the high-yielding stocks that make up this ETF's assets should (as a group) be a major beneficiary if rates start to fall later this year and into 2025, as most experts expect.
A disconnect in small caps and value stocks
Earlier this year, I wrote about how small-cap stocks were trading at their lowest price-to-book valuation relative to large-cap stocks in 25 years. And the charts tell the story. Over the past five years, the S&P 500 has outperformed small caps 99% to 40%. And the last time the valuation difference was this great, it preceded a long period of small-cap outperformance.
Since the start of 2024, the disconnect has only grown wider, with the S&P 500 outperforming the Russell 2000 small-cap index by about 6 percentage points.
Value stocks have similarly underperformed growth stocks, with growth delivering roughly double the performance of value over the past five years.
Perhaps my top ETF pick for 2024 and beyond for investors who put money to work now is the Vanguard Small-Cap Value ETF (VBR 0.37%). It combines the performance disconnect of both small caps and value stocks and could be a massive beneficiary if the gaps start to narrow as rates fall and economic fears subside.
Buy for the long term
While I believe it's a great time to get into all three of these ETFs right now, I have no idea what they (or the overall stock market) will do over the coming weeks or months, or if they'll outperform the S&P 500 for the remainder of 2024. However, these are solid ETFs at attractive prices and should be excellent additions to the portfolios of investors who measure their returns in years.
