3 Vanguard ETFs to Buy Hand Over Fist If Fed Cuts Rates in September

If we were to ask a Magic 8 Ball if the Federal Reserve will cut interest rates in September, I’m pretty sure the answer would be “signs point to yes” or maybe even “most likely.” At least, those would be the answers if the Magic 8 Ball worked properly.

Many economists and investors expect a rate cut next month as minutes from the Federal Reserve’s last meeting indicate that lower interest rates are on the way.

What should investors do if a Fed rate cut occurs? Here are three Vanguard exchange-traded funds (ETFs) to buy off the cuff.

1. Vanguard Long-Term Bond ETF

When interest rates fall, bond prices rise. And long-term bond prices rise more than shorter-term bonds. This makes sense. Rate cuts prompt institutional and income investors to buy bonds that pay higher yields for the longest period of time. This buying pressure drives up bond prices.

There is a Vanguard ETF that is ideal for taking advantage of this inverse correlation between interest rates and bond prices: Vanguard Long Term Bond ETF (BLV 0.67%). This ETF currently holds 3,095 long-term bonds.

How long are we talking about? The average effective maturity of the bonds in the ETF is 22.5 years. Almost half of the bonds are issued by the US government.

Vanguard funds are known for their low costs. The Vanguard Long-Term Bond ETF does not disappoint in this regard. The annual expense ratio is just 0.04%, a fraction of the 0.83% average expense ratio of similar funds.

2. Vanguard Real Estate ETF

Long-term bonds aren’t the only beneficiaries of lower interest rates. Share prices of real estate investment trusts (REITs) typically rise as rates fall. These companies rely on loans to finance new property purchases, and lower rates can translate to increased profitability.

The Vanguard Real Estate ETF (VNQ 2.20%) allows investors to buy 155 REIT shares in one shot. The median market value of these REITs is $32 billion. The ETF’s main holdings include the Vanguard Real Estate II Index Fund (a Vanguard mutual fund), Prologue, American Tower, Equinixand Welltower.

A big plus for this Vanguard ETF is its high forward dividend yield of about 4%. REITs must return at least 90% of their earnings to shareholders in the form of dividends, and this gives the Vanguard Real Estate ETF plenty of income to distribute each quarter.

Another advantage of the ETF is the annual expense ratio of 0.13%. While that’s higher than the cost of the Vanguard Long-Term Bond ETF, it’s still much lower than the 1.07% average for similar real estate funds.

3. Vanguard Small-Cap Value ETF

Small-cap stocks also tend to rise when interest rates fall. Like REITs, smaller businesses often need to borrow money to finance their growth. Therefore, lower rates can increase the profitability of small-cap companies.

Vanguard offers several small-cap funds. I especially like it Vanguard Small-Cap Value ETF (VBR 2.54%). This ETF seeks to track the performance of the CRSP US Small Cap Value Index, which features stocks with relatively low market capitalizations and valuations.

The Vanguard Small-Cap Value ETF currently holds 848 shares. The average price-to-earnings ratio for these stocks is 15.6, significantly lower than the earnings multiple of nearly 27.5 for large-cap stocks in S&P 500.

You won’t pay out of the nose to own this Vanguard ETF, either. The annual expense ratio is 0.07%, compared to an average expense ratio of 1.11% for similar funds.