Most investors default to an S&P 500 (^GSPC +0.69%) tracking vehicle without giving it a second thought. It's the easy choice -- until you realize that "buying the market" now means putting nearly a third of your money into a handful of tech giants. That's not diversification. That's a concentrated bet dressed up as an index fund.
There's a better option. If I could buy just one Vanguard exchange-traded fund (ETF) right now, it would be the Vanguard Value ETF (VTV +0.64%) -- a fund that deliberately avoids the megacap tech names dominating the S&P 500, and instead owns the dividend-paying workhorses of the American economy. Here's why.
Image source: Getty Images.
What you're actually buying
The Vanguard S&P 500 ETF (VOO +0.69%) holds Nvidia and Apple as its top holdings in a concentrated manner. These two stocks alone account for over 15% of the Vanguard S&P 500 ETF's current holdings. If either stumbles, the whole fund feels it.
The Vanguard Value ETF spreads its bets more evenly. Its top positions -- JPMorgan Chase, Berkshire Hathaway, ExxonMobil, Johnson & Johnson, and Walmart -- all sit in the low single digits. No single company can drag the fund down.
The Vanguard Value ETF's expense ratio of just 0.04% keeps costs microscopic, while its dividend yield of approximately 2.1% provides income that growth-focused funds simply can't match. That's a potent blend of low fees and healthy income.
The inflation hedge hiding in plain sight
When commodities rally and inflation fears rise, value stocks historically outperform growth stocks. That's not a coincidence -- it's math.
Here's why: The Vanguard Value ETF gives you meaningful exposure to energy majors like ExxonMobil and Chevron -- companies that benefit directly from rising commodity prices. When inflation drives up the prices of oil and materials, these holdings appreciate. You're not making a direct commodities play, but you're riding the same tailwinds.
NYSEMKT: VTV
Key Data Points
Meanwhile, financial stocks in the Vanguard Value ETF tend to benefit from the higher interest rate environment that typically accompanies concerns about inflation. JPMorgan Chase and other banking giants earn wider spreads when rates rise, padding their already substantial profits.
Cash flow over hype
When markets are indecisive, cash flow becomes king. The Vanguard Value ETF focuses specifically on companies trading at lower valuations relative to their fundamentals -- businesses generating real profits today rather than promising them tomorrow.
This matters during volatile stretches because established cash flows provide a floor under stock prices. High-multiple growth stocks can crater 30% or 40% when sentiment shifts. Value stocks rarely suffer that same fate because their prices are already grounded in current earnings rather than optimistic projections.
The valuation advantage
Right now, the popular Vanguard Growth ETF (VUG +0.71%) trades at roughly 40 times earnings. The Vanguard Value ETF? Around 20 times.
That gap represents a margin of safety -- if earnings disappoint across the market, value stocks have far less room to fall than growth plays -- especially after this year's run-up in large-cap tech.
This doesn't mean growth stocks won't eventually resume leadership. They probably will. However, if you're seeking stability and income while awaiting clarity, the Vanguard Value ETF provides exactly what most portfolios require.
The ballast your portfolio needs right now
Uncertainty isn't going away anytime soon. Trade tensions, inflation concerns, and questions about artificial intelligence (AI) valuations will keep markets guessing.
But you don't need to guess. Owning 314 dividend-paying companies with established business models and reasonable valuations is about as close to a sure thing as investing gets.
Buy the Vanguard Value ETF to anchor your portfolio with undervalued, cash-rich companies built to weather whatever comes next. When the market finally picks a direction, you'll be ready -- and you'll have collected dividends the entire time you waited.
