2 Vanguard ETFs to Buy Hand Over Fist and 1 to Avoid

If you’re interested in investing in exchange-traded funds (ETFs), you’ll want to put the Vanguard family of funds high on your list to consider. Vanguard is known for its low-cost funds. Over time, lower expenses can lead to significantly higher profits.

While some Vanguard ETFs are great choices right now, others are not. Here are two Vanguard ETFs to buy on hand and one to avoid.

Buy no. 1: Vanguard Long-Term Bond Index Fund

Probably the most important factor to consider when choosing which Vanguard ETFs to buy right now is that the Federal Reserve is lowering interest rates. The last round of Fed rate cuts took place four years ago. However, the Federal Reserve recently announced a sharp 0.5% cut in interest rates and is expected to make further smaller cuts.

The Vanguard Long Term Bond Index Fund (BLV 0.19%) should be a great ETF to buy in a falling rate environment. As the name suggests, this ETF focuses on long-term bonds. It currently holds 3,130 bonds with an average effective maturity of 22.4 years.

Long-term bonds are more sensitive to interest rate cuts than shorter-term bonds. When interest rates fall, newly issued bonds will have lower yields than existing bonds. This makes existing bonds more attractive to investors and usually increases their values.

Almost half of the bonds held by the Vanguard Long-Term Bond Index Fund are issued by the US government. The rest are investment-grade corporate bonds, with the highest concentration in those with A (high) and BBB (good) credit ratings.

The Vanguard Long-Term Bond Index Fund offers a 30-day SEC return (an annualized return based on the current market return to maturity over a 30-day period) of 4.69%. Like most Vanguard funds, it’s cheap to own, with an annual expense ratio of just 0.04%.

Buy ETF no. 2: Vanguard Small-Cap Value

The Federal Reserve’s interest rate cuts don’t just affect bonds; it also affects stocks. Lower rates are great for businesses of all sizes, but smaller businesses often especially benefit from lower borrowing costs.

Lower interest rates can also make investors more willing to take on higher levels of risk. Because small-cap stocks are typically viewed as higher-risk/higher-reward alternatives than large-cap stocks, they can enjoy an extra boost when rates fall.

Vanguard offers several ETFs that focus on small-cap stocks. The Vanguard Small-Cap Value ETF (VBR -0.09%) could be an excellent choice in today’s environment. This ETF seeks to track the performance of the CRSP US Small Cap Value Index, which includes stocks with relatively smaller market caps that are attractively valued.

Vanguard Small-Cap Value ETF owns 847 shares. The average price-to-earnings ratio of these stocks is 16, well below the 28.4 trailing earnings multiple for S&P 500.

The annual expense ratio of this Vanguard ETF is 0.07%. The average expense ratio of similar funds is 1.11%, based on data from Morningstar.

One to avoid: Vanguard Short-Term Bond ETF

The Vanguard Short-Term Bond ETF (BSV 0.04%) not a bad ETF to own. However, in an environment where interest rates are falling, it simply isn’t one of the best Vanguard funds to buy. Why? Although short-term bond prices usually rise when interest rates fall, they do not do so as much as long-term bond prices.

This Vanguard ETF holds 2,751 short-term bonds with an average effective maturity of 2.8 years. Most of the bonds in the Vanguard Short-Term Bond ETF portfolio (69.2%) were issued by the US government. Almost all others are investment grade corporate bonds.

The 30-day SEC yield for this Vanguard ETF is 3.8%, which is understandably lower than the yield of the Vanguard Long-Term Bond ETF. As was the case with its longer-term sibling, the Vanguard Short-Term Bond ETF’s annual expense ratio is 0.04%.