3 Reasons to Buy the Vanguard Small-Cap Value ETF Like There’s No Tomorrow

Good but not great. This is the verdict for Vanguard Small-Cap Value ETF (VBR 0.85%) in the last five years. The exchange-traded fund (ETF) delivered a respectable total return of 65% during the period. However, its performance lagged far behind S&P 500his total return of 103%.

So should investors be pouring their money into other ETFs now? Not. Here are three reasons to buy the Vanguard Small-Cap Value ETF like there’s no tomorrow.

1. There it is a tomorrow

What’s the most important short-term reason to buy the Vanguard Small-Cap Value ETF like there’s no tomorrow? There it is a tomorrow And it is a very important day for investors.

The Federal Open Market Committee (FOMC) will conclude its last meeting on September 18. It is expected to announce the first rate cut since March 2000.

Several factors have many speculating that the Fed will cut rates. Inflation is moderating. Jobs reports weaken somewhat. In his speech in Jackson Hole, Wyoming, in late August, Federal Reserve Chairman Jerome Powell noted both trends, stating: “The upside risks to inflation have diminished. And the downside risks to employment have increased.” As a result, Powell stated, “The time has come for policy to adjust.”

Why is a potential rate cut important to the Vanguard Small-Cap Value ETF? Smaller companies tend to be more sensitive to interest rates than larger companies. More borrowing is often required to finance growth. If the Fed cuts interest rates, look for small-cap stocks and ETFs (including the Vanguard Small-Cap Value ETF) to rally.

2. There are years to reap the fruits after tomorrow

The long-term reason to invest in the Vanguard Small-Cap Value ETF is even more important than the short-term reason. There are years to reap from tomorrow’s potential rate cut. Over the long term, small-cap stocks have been particularly big winners.

Wellington Management published an analysis in January 2023 that showed that small-cap stocks outperformed large-cap stocks strongly and consistently over the long term. Since 1936, they have averaged an annual gain of more than 300 basis points higher than large-cap stocks. Small-cap stocks also delivered higher gains than large-cap stocks more than 69% of the time. Furthermore, small-cap value stocks have historically generated higher earnings growth and returns than other asset classes, including small-cap stocks.

There are lots of theories as to why small-cap stocks have been big long-term winners. First, smaller companies don’t get as much analyst coverage as larger companies. This can lead to price inefficiencies, especially for small-cap stocks. Smaller companies have more room to grow than larger companies. Their higher risk premium can also lead to higher returns.

3. It’s a cheap and convenient way to own a large basket of small-cap stocks

You could buy a lot of individual stocks with little value. However, it would require a significant amount of time and energy to research each stock, determine the best alternatives, and then buy the stock. Using a small cap ETF is much easier and more convenient. For example, the Vanguard Small-Cap Value ETF allows investors to buy 848 stocks in one fell swoop.

The Vanguard Small-Cap Value ETF’s main advantage over other funds is its low costs. This Vanguard ETF’s annual expense ratio is 0.07%, much lower than the average expense ratio of 1.11% for similar funds.

There’s a tomorrow — and it should be a good one for the Vanguard Small-Cap Value ETF. But the many tomorrows to come will likely be even better for investors looking for a cheap and convenient way to profit from small-cap stocks.