Large-cap growth stocks have begun retreating in the latter half of the year, influenced by expected interest rate cuts and valuation concerns. Investors should pay close attention to these potential rate cuts, as they often benefit small-cap and mid-cap stocks more than their large-cap counterparts, given the former's greater reliance on financing to drive growth.
This market environment sets the stage for three Vanguard exchange-traded funds (ETFs) to potentially outperform in the second half of the year. These three funds ought to benefit from a marketwide shift toward smaller, growth-oriented companies and those offering attractive valuations. Armed with this background, let's explore these three Vanguard stock ETFs in detail.
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Vanguard Small-Cap Value Index Fund ETF Shares
The Vanguard Small-Cap Value Index Fund ETF Shares (VBR +0.37%) tracks the CRSP US Small Cap Value Index. It has an SEC yield of 2.1% and an expense ratio of 0.07%.
NYSEMKT: VBR
Key Data Points
The ETFs five largest positions consist of management consultancy Booz Allen Hamilton Holding, building materials manufacturer Carlisle Cos., financial services provider First Citizens BancShares, construction and facilities services firm EMCOR Group, and building products supplier Builders FirstSource.
At recent prices, the Vanguard Small-Cap Value Index Fund ETF Shares has gained 10.8% year to date, with most of these gains coming in the month of July. This recent rally isn't surprising, given that small-cap value stocks often perform well when interest rates fall.
What's the main appeal? This Vanguard ETF provides exposure to smaller companies with value characteristics, which could prove beneficial if the market tilts toward undervalued growth equities in the second half of the year.
Vanguard Mid-Cap Index Fund ETF Shares
The Vanguard Mid-Cap Index Fund ETF Shares (VO +0.67%) tracks the CRSP US Mid Cap Index. It offers an SEC yield of 1.56% and a low expense ratio of 0.04%. The ETF's top five holdings consist of electronic connector manufacturer Amphenol, aerospace systems supplier TransDigm Group, communications technology firm Motorola Solutions, energy producer Constellation Energy, and healthcare real estate investment trust Welltower.
NYSEMKT: VO
Key Data Points
The Vanguard Mid-Cap Index Fund ETF Shares has gained 8.41% year to date. Mid-cap stocks offer a balance between the stability of large-caps and the growth potential of small-caps. This ETF thus provides exposure to mid-sized companies that may benefit from changing interest rates, while offering a greater margin of safety than its small-cap counterpart discussed below.
Vanguard Small-Cap Index Fund ETF Shares
The Vanguard Small-Cap Index Fund ETF Shares (VB +0.76%) tracks the CRSP US Small Cap Index. This small-cap fund offers an SEC yield of 1.44% and an expense ratio of 0.05%. The ETF's five largest positions consist of midstream energy infrastructure operator Targa Resources, footwear and apparel maker Deckers Outdoor, law enforcement technology provider Axon Enterprise, industrial software developer PTC, and semiconductor materials supplier Entegris.
The Vanguard Small-Cap Index Fund ETF Shares has jumped by 9.45% year to date. Small-cap stocks tend to be more volatile but offer higher growth potential than mid or large cap equities, especially during economic shifts. This ETF provides broad exposure to the small-cap market, potentially capitalizing on the segment's historical responsiveness to rate changes.
Key takeaways
These three Vanguard ETFs provide focused exposure to market segments that may outperform in the coming year. More specifically, the expected interest rate cuts in the latter part of this year could create an advantageous climate for small and mid-cap stocks.
Smaller growth companies might also benefit from a broader market shift toward value. Speaking to this point, tech giants like Nvidia have seen remarkably high valuations this year, driven by the artificial intelligence (AI) gold rush. This trend could reverse as AI investors begin to lock in profits and diversify into a broader range of growth stocks.
