Prediction: These 3 Vanguard ETFs Will Double Investors’ Money in 5 Years

Despite a rising interest rate environment and recession fears, the stock market continued to deliver solid performance. Over the past year, the S&P 500 is up 24%.

However, much of the strong performance was driven by growth stocks, particularly the mega-head variety. Value stocks, small-cap stocks and real estate investment trusts (REITs) all dramatically underperformed the overall market. But I think that’s about to change. Here’s a rundown of the underperformance, why the next few years could be great for investors in these areas of the market, and three ETFs that have the potential to double investors’ money over the next five years.

Three groups of underperforming stocks

To put it mildly, it’s been a long cycle of outperformance for large-cap stocks, and mega-cap tech stocks have fueled much of the market’s gains. Here’s a comparison of the performance of the S&P 500, value stocks, small-cap stocks, and real estate over several different time frames.

Data source: YCharts. Performance from 08/14/2024.

Catalysts on the horizon

While there are several reasons for the difference in performance between these stock groups, including increased investment in artificial intelligence that has fueled large-cap tech stocks, one big reason is interest rates.

Value stocks, small caps and real estate stocks tend to be more interest rate sensitive than large caps. First, they tend to rely on borrowed money (debt) more than the largest companies in the market, and benchmark interest rates affect borrowing costs.

Stocks in these three groups are also more likely to pay dividends (especially stocks and real estate), and as money has flowed out of the stock market and into risk-free assets like Treasuries and CDs , in recent years, the actions of these groups have been the main victims of these exits. As rates fall and investors cycle money back into the market, these groups should be strong beneficiaries.

The latest market expectation is for the Fed to start cutting interest rates quite aggressively starting at the September meeting. Of Next September, median expectations call for a total of 2.25 percentage points of Fed interest rate cuts, according to CME Grouphis FedWatch tool. And I think all three groups of stocks discussed here will be big winners.

Three ETFs I’m Buying

You don’t have to buy individual value stocks, small caps or REITs to capitalize on these tailwinds. In fact, there are three ETFs that I have bought or plan to buy in 2024 that I think could double investors’ money over the next five years. They are:

• Vanguard Value ETF (VTV 0.30%)
• Vanguard Russell 2000 ETF (VTWO 0.30%)
• Vanguard Real Estate ETF (VNQ -0.06%)

Like all Vanguard ETFs, these are passive index funds and all have low investment fees. The most expensive of the three (the real estate fund) has an expense ratio of just 0.13%, meaning $1.30 in taxes will be assessed each year for every $1,000 in assets. And all three invest in a diverse range of stocks that give investors broad exposure.

The Vanguard Value ETF holds 342 different stocks with top stocks include Berkshire Hathaway, Broadcomand JPMorgan Chase. The Russell 2000 ETF invests in 2,000 companies, none of which account for more than 0.41% of the fund’s assets. And the Vanguard Real Estate ETF offers exposure to more than 150 REITs, with large positions in solid industry leaders such as Prologue and American Tower.

A bold prediction

For an investment to double over a five-year period, it must produce approximately 15% total annual return. That would be significantly higher than the S&P 500’s long-term average, which is 9%-10%, depending on the exact period you look at. But the valuation gap between these groups of stocks and the S&P 500, combined with the tailwind of falling rates could certainly happen.