Vanguard is known for its low-cost ETFs, and for very good reasons. Decades ago, Vanguard pioneered the concept of a low-cost index fund, and the company now offers dozens of mutual funds and ETFs with expense ratios far below the overall ETF industry average.
If you're building a portfolio of Vanguard ETFs, a few are excellent choices no matter what the stock market and economy are doing. For example, I'd argue that it's never a bad time to buy the Vanguard S&P 500 ETF (VOO -0.57%). However, there are some that look particularly attractive right now, and here are two you might want to consider if you have $500 to add to your Vanguard ETF portfolio.
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A big valuation gap and great long-term potential
It's a smart idea for all index fund investors to have some small-cap exposure, and now could be an excellent opportunity to get it. I've been adding the Vanguard Russell 2000 ETF (VTWO -0.22%) to my portfolio gradually over the past year or so, and think it looks more attractive than ever right now.
At the beginning of 2024, small-cap stocks were trading for their lowest valuations relative to large caps since the late 1990s. And since that time, the gap has widened even further. Consider this: The typical S&P 500 stock trades for 4.5 times book value and for a P/E ratio of 24.6. The Russell 2000 has a price-to-book multiple of just 1.7 and trades for less than 16 times earnings.
I don't necessarily think the valuation gap will close entirely. But there's a solid case to be made that we're at an inflection point, shifting from an environment that has been strong for large-cap companies, such as lots of artificial intelligence (AI) innovation and strong consumer, to one that favors small caps -- falling interest rates, increased investor appetite for speculation.
Small-cap stocks tend to be more volatile over time, but they also tend to produce long-term returns on par with (or greater than) that of the S&P 500. And right now could be an excellent entry point.
A rate-sensitive sector with lots to like
The real estate sector has underperformed the S&P 500 for the past several years, and the main reason why is interest rates. Real estate investment trusts, or REITs, perform best in a low-rate or falling-rate environment, and we've seen the exact opposite over the past three years. But opportunistic investors may want to take a closer look at the Vanguard Real Estate ETF (VNQ 0.15%) while it's still cheap.
There are a few reasons why real estate tends to outperform when rates fall. First, real estate companies tend to rely on borrowed money to grow (just like you might use a mortgage when buying a home), and falling rates make borrowing cheaper. Second, falling rates tend to cause yield-focused investments to rise, as yield and price have an inverse relationship. And perhaps most importantly, falling rates make commercial properties more valuable, all other factors being equal.
The Vanguard Real Estate ETF tracks an index of REITs, so it can be a great way to invest in the sector without too much reliance on any single stock. As REITs tend to have above-average dividends, the ETF currently has a 4.1% yield, making it a solid choice for both growth and income-seeking investors.
As a final thought, I own both ETFs as long-term investments, and caution others to approach them in the same way. I have absolutely no idea what either ETF (or the stock market in general) will do over the coming weeks or months, but I'm quite confident that I'll be happy I own these two when looking back in five to 10 years.
