Index funds are an increasingly popular way for everyone, from beginners to seasoned investors, to put their money to work in the financial markets.
Just like previous years, 2023 saw investors investing billions of dollars in index funds and ETFs. Vanguard, which created the first index fund nearly 50 years ago, has seen investors add more than $155 billion to its ETFs alone this year, far outpacing any other fund company. And there are still about two weeks left.
Here are three of the top Vanguard ETFs that investors are buying and which one I would buy for 2024.
1. Vanguard 500 ETF
THE Vanguard 500 ETF (NYSEMKT: VOL) is Vanguard’s largest ETF, with approximately $360 billion in assets under management. This saw substantial momentum in 2023, and not just because the underlying index, the S&P500, is up about 23% this year. Investors added $39.8 billion to the fund in net inflows.
There’s a lot to like about the Vanguard 500 ETF. It has a spending rate by only 0.03%. So for every $1,000 you invest in the fund, you’ll only pay $0.30 in fees. Meanwhile, fund managers do a great job tracking the S&P 500 and keeping taxes and fees low.
For exhibition at large cap stocks, the Vanguard 500 ETF is about as simple as it gets. And that makes it a great choice for ETF investors.
2. Vanguard Total Bond Market ETF
THE Vanguard Total Bond Market ETF (NASDAQ:BND) became the first in its category to achieve $100 billion in assets under management. This was propelled by $16.2 billion in net investor inflows this year.
The bond market rallied late in the year, as positive economic data and comments from the Federal Reserve indicate we should see significant rate cuts in 2024. As interest rates fall, bond prices rise. And even the expectation of an interest rate cut from the Fed will lower current bond yields.
The Vanguard Total Bond Market ETF tracks the Bloomberg US Aggregate Bond Index. The index tracks medium-term investment grade debt, including corporate bondsgovernment bonds, securities backed by mortgagesand asset-backed securities. This gives investors broad exposure to the bond market.
That said, investors looking to diversify their stock holdings with bonds might find that the heavy weighting of corporate bonds is much more correlated with their stocks than they would like. This is one of the reasons why many investors have chosen to purchase another Vanguard bond ETF.
3. Vanguard Mid-Term Cash ETF
THE Vanguard Mid-Term Cash ETF (NASDAQ:VGIT) hasn’t generated as much investor interest as Vanguard’s largest bond index fund. Investors added $7.5 billion to the fund in 2023. But what makes this particularly notable is that the ETF only has $21.1 billion in funds. assets under management – about a fifth of the Total Bond Market ETF.
As its name suggests, the Vanguard Intermediate-Term Treasury ETF invests in medium-term securities Treasury bonds maturation between three and ten years. Treasuries don’t offer yields as high as corporate bonds, which is why the ETF’s yield is slightly lower. In turn, however, investors will find that Treasury prices are historically less correlated with stock price movements. This can be much more important to overall portfolio returns than a few basis points of additional return.
Treasury bonds are generally considered a safe haven for investors amid economic uncertainty. This can help protect a portfolio against a recession, since the debt is guaranteed by the U.S. government. Bonds guaranteed by a company can easily become worthless if the company goes bankrupt. In the current economic context, it is not surprising that investors are flocking to Treasury bonds.
Even if you don’t think we’re headed for a recession in 2024, the Vanguard Intermediate-Term Treasury ETF is a smart way to diversify your stock portfolio while Treasury yields remain high.
But I would still add an additional ETF to the group.
The Only Vanguard ETF Worth Adding for 2024
While a portfolio consisting of a large-cap fund like the Vanguard 500 and a Treasury bond fund like the Mid-Term Treasury ETF is a good start, you may also want to gain exposure to a market sector that has been unloved in 2023.
Small-cap value stocks have historically outperformed large-cap stocks over the long term. However, very few investors saw good reason to invest in a small-cap value fund like the Vanguard Small Cap Value ETF (NYSEMKT:VBR) in 2023.
There are valid reasons for this. Economic uncertainty is not kind to small businesses. The same factor that caused investors to turn to Treasuries in 2023 is the same reason they fled small caps. If we enter a recession, small-cap stocks are much less likely to survive than a company that has joined the S&P 500.
Another reason small caps have underperformed this year is that they are much more sensitive to interest rates. The reason is twofold. First, many small-cap stocks finance their growth through debt. If interest rates rise, their interest expense increases and their earning power decreases. The second is that when interest rates rise, the present value of future earnings decreases because investors use a higher discount rate.
But the tide is turning. Investors are increasingly confident that interest rates will fall relatively quickly in 2024. And small-cap stocks have performed extremely well during the recent market rally, driven by this optimism. Still, it’s not too late to add small-cap stocks to your portfolio.
Adding the Vanguard Small-Cap Value ETF to your portfolio for 2024 is one of my favorite ways to diversify a core ETF portfolio.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Bond Index Funds-Vanguard Total Bond Market ETF and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
3 Vanguard ETFs Investors Couldn’t Get Enough of in 2023 and the 1 I’d Buy for 2024 was originally published by The Motley Fool
