Did you know that in the past five years, the S&P 500‘s total return (which includes dividends) is around 100%? That’s even including a disastrous year for the markets in 2022 when many stocks incurred significant declines. The S&P 500’s long-run average is approximately 10% but over the past five years, its compound annual growth rate is up around 15%. The market could be due for a slowdown — but that doesn’t mean you need to get out of stocks entirely.
A safer option for investors right now is to target value stocks, and investments that are more reasonably priced than high-flying tech and growth names. By keeping valuations in mind, you can ensure that you aren’t taking on too much risk. That doesn’t mean your investments won’t fall in value in the event of a market crash, but they may be much less vulnerable to significant corrections.
A top Vanguard fund that can be a great option to consider for this purpose is the Vanguard Value Index Fund ETF (VTV 0.11%). Here’s a closer look at why it could make for an underrated investment right now.
^SPX data by YCharts
The ETF has underperformed the S&P 500 but that could change
The Vanguard Value Index Fund is a passively managed ETF that yields around 2.3% and focuses on large-cap value stocks. Currently, it averages a fairly modest price-to-earnings multiple of 20. That’s far lower than the S&P 500 average of nearly 26.
Investors may inevitably grow concerned with rising valuations in the stock market and start turning more toward value stocks, which can lead to better returns for this ETF in the future. While it has underperformed the S&P 500 in recent years, the tide could turn in the other direction, especially if there’s a correction in the markets.
It’s a diverse fund with many blue chip stocks
Within the fund, investors not only get good value, but also plenty of diversification; the Vanguard ETF holds more than 330 stocks. Its three largest sectors are financials, healthcare, and industrials, which make up around 53% of its total holdings.
Its top three holdings are Berkshire Hathaway, JPMorgan Chase, and Broadcom. However, even its largest holding (Berkshire) only makes up 3.2% of the portfolio’s total weight. This is key for risk-averse investors because it means that even if an individual stock within the fund underperforms or experiences a big drop in value, it won’t necessarily be enough to drag the entire ETF down. Many funds, specifically those focused on growth stocks and tech, are often much more vulnerable to just a handful of large investments. But with this Vanguard ETF, investors are getting much more safety and stability.
The ETF also charges a very modest expense ratio of 0.04%, which ensures that fees won’t take a big chunk out of your overall returns. It’s yet another reason why this can be an excellent investment to hold for the long haul.
In times like these, investors should target value investments
Value stocks may not make for the most exciting investments to hold in your portfolio, but they can be critical to hang on to at a time when the stock market may be getting overvalued. Whether you’re a long-term investor who wants a good ETF to build their portfolio around or you just want some safe investments to hang on to, the Vanguard Value Index ETF can be a solid option to consider today.
JPMorgan Chase is an advertising partner of Motley Fool Money. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, JPMorgan Chase, and Vanguard Index Funds-Vanguard Value ETF. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.