Vanguard’s Small-Cap Value ETF Surges, Defying Trends
The stock market is currently thriving, with many exchange-traded funds (ETFs) from Vanguard demonstrating impressive performance. In 2024, nearly half of Vanguard’s 88 ETFs have posted total returns of at least 20%.
While some high-performing ETFs aren’t surprising, one Vanguard ETF that might catch you off guard is nearing its all-time high and has room to grow.
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Unexpected Growth in Small-Cap Stocks
Funds like the Vanguard S&P 500 Growth ETF and the Vanguard Mega-Cap Growth ETF have performed well, largely due to investors’ excitement over stocks linked to artificial intelligence (AI). Companies such as Nvidia, Broadcom, and Oracle are seeing increased investor interest. Even some non-tech giants like American Express and Walmart have also seen significant gains.
On the other hand, small-cap stocks have lagged behind their large-cap counterparts for several years. Value investors have found themselves dissatisfied as small-cap value stocks have remained pale compared to the allure of growth stocks. For context, as of July 1, the Vanguard Small-Cap Value ETF (NYSEMKT: VBR) had only increased by 0.33% year-to-date, contrasting sharply with the 24% rise in the Vanguard S&P 500 Growth ETF.
Recently, however, the narrative has shifted. The Vanguard Small-Cap Value ETF has experienced significant upward momentum, reaching a record high in late November and maintaining a position close to that peak.
Despite being less glamorous than big tech stocks, many companies within the Vanguard ETF’s portfolio, including Smurfit WestRock and EMCOR Group, are gaining traction.
Factors Driving Future Growth
Momentum is expected to continue, propelling the Vanguard Small-Cap Value ETF even higher. Several favorable conditions may be at play.
Notably, the Federal Reserve has cut interest rates twice in recent months. Smaller companies tend to rely more on borrowing compared to larger firms, so lower interest rates mean reduced borrowing costs and increased profitability.
Additionally, a potential second Trump administration may bring deregulation. If President-elect Trump follows through on his promise to eliminate 10 old regulations for every new one, it could positively impact small companies, which typically face heavier regulatory costs compared to larger entities. His proposed tariffs on imports could also benefit small-cap firms competing with foreign businesses.
Moreover, there is a historical tendency for small-cap and large-cap stock valuations to converge over time. The valuation gap between these groups was the largest since 1998 and 1999 as of August 2024. Following that period, small-cap stocks outperformed their larger peers.
Historical Context Supports Future Returns
Historically, small-cap stocks have shown about a 10% higher return than large-cap stocks within the first year following an interest rate cut by the Federal Reserve. Records since 1936 indicate that small-cap stocks outshine large-caps, while value stocks tend to perform better than growth stocks overall.
The Vanguard Small-Cap Value ETF appears to be a strong choice for investors in the upcoming year, and its prospects seem even brighter longer term. Historical trends favor this ETF.
Don’t Miss This Opportunity
If you’ve ever felt you missed out on key investments, this might be a moment to pay attention.
Occasionally, our analysts issue a “Double Down” stock recommendation for companies poised for significant growth. If you worry about having missed the investment boat, consider acting now before another chance slips away. The numbers illustrate the potential:
- Nvidia: A $1,000 investment made when we recommended it in 2009 would now be worth $369,349!*
- Apple: If you put in $1,000 back in 2008, you’d have $45,990 now!*
- Netflix: A $1,000 investment from 2004 would have grown to $504,097!*
We are currently issuing “Double Down” alerts for three exceptional companies; this could be a fleeting opportunity.
See 3 “Double Down” stocks »
*Stock Advisor returns as of December 2, 2024
American Express is an advertising partner of Motley Fool Money. Keith Speights has positions in Vanguard Small-Cap Value ETF. The Motley Fool has positions in and recommends EMCOR Group, Nvidia, Oracle, and Walmart. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
