The group known as the “Magnificent Seven” has been responsible for a significant portion of the stock market’s gains in the last few years, and this remains the case despite the performance of other stocks. Nvidia The Magnificent Seven have experienced a recent decline. In the last year, they have seen a combined increase of 43%, while the other group has only grown by 21%. S&P 500 as a whole.
Nevertheless, the market conditions prevailing next In a few years, a different category of stocks may become more favorable.
Let me make it clear that this is a confident forecast. Given the appropriate conditions, it is possible that the large technology companies with high market capitalization could keep surpassing expectations. However, I am inclined to think that factors such as decreasing interest rates and growing consumer confidence might benefit smaller companies and undervalued stocks in the long run, despite my belief in the future prospects of technologies like artificial intelligence (AI). ETF stands for Exchange-Traded Fund, and Vanguard Small-Cap Value ETF is a specific fund that focuses on investing in small-cap value stocks. ( VBR 0.03% ) Allows you to invest in a combination of assets with just one investment.
Can you explain what the Vanguard Small-Cap Value ETF is?
The Vanguard Small-Cap Value ETF is an index fund that focuses on investing in small-cap stocks with value attributes. Currently, the fund holds 848 diverse stocks, with a median market capitalization of 13.5%. Additionally, it boasts a very low-cost structure, with an expense ratio of only 0.07%. This implies that if you invest $1,000, just $0.70 will be spent on annual investment fees.
This ETF is well diversified, with each stock representing less than 0.63% of the total holdings. Even though you may not recognize many of the stocks it holds (as it focuses on small-cap companies), some of the more popular ones include Booz Allen Hamilton is the name of the company. ( BAH 0.87% ) , Williams-Sonoma is a retailer that sells high-quality kitchenware, home furnishings, and other related products. ( WSM -1.76% ) , and BJ’s Wholesale Club is a membership-based warehouse club chain that offers a variety of products at discounted prices to its customers. ( BJ ) .
What makes this ETF potentially capable of providing high returns
Currently, small-cap value stocks are being sold at low prices. On average, the Vanguard Small-Cap Value ETF holds stocks with a price-to-book ratio (P/B) of 1.7 and an average earnings multiple of 14.1. This is significantly lower than… S&P 500 ETF offered by Vanguard ( VOO -0.08% ) , where the typical stock is valued at 4.7 times its book value and trades for over 27 times its earnings.
This is a big Discrepancy in valuation. Large and small companies have not had such distinct P/B valuations since 25 years ago, with small companies showing better performance for over ten years following this trend.
After all that has been mentioned, I am not just wishing for the gap to decrease in the coming years. There are valid reasons to expect that there will be factors that could trigger this change, especially in relation to interest rates.
Following lower-than-anticipated inflation figures and somewhat lackluster employment numbers, there has been a significant increase in the anticipation of interest rate reductions by the Federal Reserve in the past few weeks. Currently, the average prediction is for a cumulative decrease of two percentage points in interest rates by September 2025, with the possibility of further cuts thereafter.
A decreasing interest rate environment may benefit small capitalization and value stocks for two main reasons. Firstly, businesses in these sectors typically rely more on borrowing (debt) compared to larger companies. Therefore, with lower interest rates, they can reduce their borrowing expenses.
Furthermore, a significant shift occurred as investors moved their money away from small company stocks and dividend-paying stocks once interest rates began to increase. This change was expected as investors seeking income found higher returns of 5% from certificates of deposit (CDs) and short-term government securities more attractive than income-generating stocks such as utilities and real estate investment trusts (REITs).
Nevertheless, with the decrease in risk-free interest rates, there is a possibility of a significant amount of money being reinvested in these sectors of the stock market. Additionally, there is an opposite correlation between yield and price, meaning that when interest rates decrease, it typically leads to an increase in value for stocks that offer steady dividends (often categorized as “value stocks”).
My confident forecast
I’m not implying that the Vanguard Small-Cap Value ETF will necessarily do better than stocks such as Nvidia. Alphabet , and Amazon In the foreseeable future, I anticipate that this ETF will perform better than the combined performance of the Magnificent Seven until at least the end of 2025.
