Big tech and artificial intelligence (AI) stocks have been the driving force behind the magnificent ongoing bull market that's been charging for the past three-plus years.
But in recent months, big tech stocks have sputtered as investors have grown wary of historically high large-cap valuations and concerns about whether the massive investment in AI infrastructure will actually pay off.
While the Nasdaq-100 is up a solid 14% year to date, over the past month and a half, the large-cap, tech-heavy benchmark is down about 5%.
On the other hand, investors are rotating into other investments, like value stocks and small caps. The Russell 2000 Index is up about 2% while the Russell 1000 Value Index has gained about 4% since June 1.
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This trend is expected to continue as large-cap valuations remain high, but also because AI is expanding beyond large technology companies to different sectors and smaller companies.
Here are two Vanguard exchange-traded funds that should benefit from this rotation out of big tech.
1. Vanguard Value ETF
The Vanguard Value ETF (VTV +0.22%) has been a direct beneficiary of the rotation of big tech into big value for a few reasons. As mentioned, investors are seeking out cheaper, reasonably valued stocks. But also, some big tech stocks, like Micron, are in such high demand that their price has not caught up to their earnings, and they are considered value stocks.
NYSEMKT: VTV
Key Data Points
That is the case with the Vanguard Value ETF, which tracks the CRSP US Large Cap Value Index. While Micron stock is up a staggering 238% year to date, it is trading at just 21 times earnings and 6 times forward earnings. So it has been classified by CRSP as a value stock, not a growth stock.
The larger point is that the Vanguard Value ETF is capturing some of the big tech and AI stocks that are actually reasonably valued, not overvalued, and benefiting from their growth.
Micron is VTV's largest holding, followed by JPMorgan Chase and Berkshire Hathaway.
Since about June 1, the Vanguard Value ETF is up about 4%, while its counterpart, the Vanguard Growth ETF, is down about 5%. Year to date, Vanguard Value has returned about 15% while Vanguard Growth is up 5%.
2. Vanguard Small-Cap Value ETF
The Vanguard Small-Cap Value ETF (VBR -0.72%) has also been on a good run this year. The ETF is up about 15% year to date, and it has gained nearly 4% since June 1. On the other end of the spectrum, the Vanguard S&P 500 ETF is up about 8% year to date and has dipped about 2% since June 1.
NYSEMKT: VBR
Key Data Points
The Vanguard Small-Cap Value Index tracks the CRSP US Small Cap Value Index, which is not quite as broad as the Russell 2000 and includes some slightly larger stocks, which might otherwise be classified as small mid caps.
The three largest stocks in VBR's portfolio are manufacturing and supply chain services company Jabil, NRG Energy, and luxury fashion company Tapestry.
But it is positioned to benefit from two broader trends in the market: the movement toward both value stocks and small caps. And many strategists, including those at Vanguard, believe that over the next 10 years or so, both value and small-cap stocks will outperform U.S. large caps.
The ETF has averaged about a 12% return over the past three years, and, on an annualized basis, has gained 8% per year over the past five- and 10-year periods.
These returns have paled in comparison to the S&P 500 and Nasdaq-100, but many experts believe the next five and 10 years will be more about value than growth.
