Forecast: These Three Vanguard ETFs Failed to Outperform the S&P 500 in 2025, Yet They Are projected to surpass the Index by 2025
This year has been stunning for the S&P 500, with numerous top growth and value stocks reaching new record highs. However, the large proportion of growth stocks in the S&P 500, such as Nvidia, makes it challenging for exchange-traded funds (ETFs) that don't hold these names to outperform the S&P 500.
The Vanguard Dividend Appreciation ETF (VIG 0.49%), Vanguard S&P 500 Value ETF (VOOV 0.73%), and the Vanguard Energy ETF (VDE 1.21%) have underperformed the S&P 500 during 2024. However, they each have a mix of high-quality holdings and reasonable valuations, which could make them competitive in 2025.
1. Vanguard Dividend Appreciation ETF
This fund sets itself apart by incorporating both growth and value stocks. Unlike certain dividend-focused funds that prioritize yields, this ETF tracks the S&P U.S. Dividend Growers Index, which only includes companies that have increased their payouts annually for at least a decade. The index excludes the highest-yielding 25% of companies that would otherwise be eligible for inclusion.
The fund's top five holdings are Apple, Broadcom, Microsoft, JPMorgan Chase, and ExxonMobil. Although JPMorgan Chase and ExxonMobil offer solid yields, Apple, Broadcom, and Microsoft have relatively low yields due to their recent higher stock performance.
Notably, the fund doesn't penalize a company for having a low yield when its stock price has performed well. In addition, Apple, Broadcom, and Microsoft regularly repurchase their stock, which is another way for companies to distribute profits to shareholders.
Because it invests in companies that consistently increase their dividends across various sectors, the Dividend Appreciation ETF avoids becoming too concentrated in low-growth sectors. One downside of high-yield ETFs is that they may contain companies with high yields due to underperformance, rather than substantial payout increases.
For instance, imagine two stocks with equal 3% yields. If one stock triples in value over five years while the other's price drops by half, the stock that outperformed will have a yield of only 1% at the end of that period, while the underperforming stock will have a yield of 6%. This demonstrates how poor performance can create high-yield investments, but it does not necessarily make such a stock a superior source of passive income.
The Dividend Appreciation ETF is well-suited for individuals who view stocks' passive income potential as only one element of their investment strategy, rather than the primary driver.
2. Vanguard S&P 500 Value ETF
The Vanguard S&P 500 Value ETF has 437 holdings, but individual stocks contribute less than 0.25% to the fund once you get beyond the top 100 or so holdings. Nevertheless, the top 10 holdings collectively make up less than 20% of the fund, indicating it isn't heavily skewed towards a few key investments.
Obviously, 63% of the fund is invested in financials, healthcare, industrials, and consumer staples, whereas only 17.5% is in tech, consumer discretionary, and communications. In contrast, the Vanguard S&P 500 ETF, which tracks the S&P 500, has about half of its holdings in tech, consumer discretionary, and communications due to the significant market values of Nvidia, Microsoft, Apple, Amazon, Tesla, Alphabet, and Meta Platforms.
Since it focuses on value stocks rather than top-growth names, the Vanguard S&P 500 Value ETF will miss out on some of the growth potential associated with trends like artificial intelligence, software, hardware, automation, robotics, and social media. However, it offers a lower valuation and a better yield in return. The Vanguard S&P 500 ETF has a 30.3 price-to-earnings (P/E) ratio and a 1.3% yield compared to a 25.9 P/E ratio and a 2% yield for the Vanguard S&P 500 Value ETF.
The Vanguard S&P 500 Value ETF is an attractive option if you're seeking an investment that features less exposure to expensive sectors and a higher yield to boost your passive income stream.
3. Vanguard Energy ETF
The Vanguard Energy ETF aims to mirror the energy sector's performance, which has seen decent gains this year, although not as substantial as the S&P 500.
Unlike the Dividend Appreciation ETF or the S&P 500 Value ETF, the Energy ETF is heavily concentrated: just two stocks, ExxonMobil and Chevron, account for 36% of its portfolio value. However, this degree of concentration might be advantageous due to the inherent volatility of the oil and natural gas industry.
ExxonMobil and Chevron boast robust balance sheets, and with their diverse business models, they offer more than just oil and natural gas production. They each have growing low-carbon divisions that invest in various technologies, such as carbon capture and storage and low-carbon fuels. They also distribute profits to shareholders through stock buybacks and growing dividend payouts.
One of the alluring aspects of the Vanguard Energy ETF is its modest P/E ratio of 8.5 and its yield of 3.3%. In the energy sector as a whole, oil and gas firms have demonstrated their ability to prosper even within the existing mid-cycle price scenario. This sector has witnessed a surge in consolidation, resulting in enhancements in efficiency and robust earnings growth.
The energy sector's affordability can be attributed to its vulnerability to downturns, its capital-intensive nature (which can strain corporate financials), and the fact that numerous legacy companies within it are under threat from the shift towards clean energy and the decreasing demand for fossil fuels and related products. However, these risks might already be factored into the valuations of companies in this sector.
By investing in this ETF, investors can secure a degree of risk diversification across the sector and collect a substantial amount of passive income while benefiting from the potential for higher oil and natural gas prices.
Take heed of market volatility
Predicting the S&P 500's short-term movements is an impossible task. However, we do know that investing in high-quality companies at reasonable valuations has proven to be a profitable long-term strategy. As of now, the S&P 500 has surged by more than 57% since the beginning of 2023, while ETFs with a growth focus, like the Vanguard Mega Cap Growth ETF, have doubled during this period.
As the market rally extends, more pressure is put on growth-oriented companies to deliver exceptional results to justify their valuations. For instance, last month, Nvidia's stock prices fell despite the chipmaker surpassing analyst expectations and raising its forecasts.
I am convinced that leading growth companies will continue to deliver outstanding results and spearhead the earnings growth of major indexes like the S&P 500. However, the market might respond to even strong results with reduced enthusiasm. In other words, the valuations of these companies have grown somewhat inflated, and their metrics will have to catch up. The good news is that a company like Nvidia is reporting unprecedented earnings growth, and its stock price is following suit. Until that changes, labeling Nvidia as a bubble stock would be misleading.
In the current climate, investing new capital in top funds with reasonable valuations, such as the Vanguard Dividend Appreciation ETF, Vanguard S&P 500 Value ETF, and the Vanguard Energy ETF, seems like a wise approach, especially for investors seeking investments that are expected to be less volatile than the major indexes if there is a stock market crash in 2025.
- With a focus on long-term dividend growth, the Vanguard Dividend Appreciation ETF strategically invests in both growth and value stocks, using a method that doesn't penalize high-performing stocks with lower yields. This balanced approach allows for a diverse portfolio across various sectors, avoiding over-reliance on low-growth sectors.
- Recognizing the importance of finance management, individuals may consider investing in the Vanguard S&P 500 Value ETF as it offers a mix of value stocks instead of top-growth names. By doing so, investors can enjoy a lower valuation and a higher yield, making it a potentially less volatile option in comparison to growth-oriented ETFs.
