Five Affordable Vanguard ETFs Reaching Record Heights following the Election
Economic and political events can significantly influence markets, particularly in the short term. The election outcome pushed major indexes such as the S&P 500 and Nasdaq Composite to new peaks.
In the two days following the election, five Vanguard sector exchange-traded funds (ETFs) reached all-time highs: the Vanguard Information Technology ETF (VGT 1.58%), Vanguard Consumer Discretionary ETF (VCR 0.68%), Vanguard Communications ETF (VOX 0.37%), Vanguard Financials ETF (VFH 1.39%), and the Vanguard Industrials ETF (VIS 0.99%).
All five ETFs mirror the performance of a stock market sector by investing in numerous companies. The expense ratio for each fund is minimal at 0.1%, or $1 for every $1,000 invested -- a reasonable price given the level of diversification these funds provide.
Let's delve into what's driving each fund and if they're worth investing in now.
1. Vanguard Information Technology ETF
Vanguard's tech-centric sector ETF soared to a new all-time high. Key holdings, such as Nvidia, Microsoft, and Apple, contributed to the growth. Nvidia dominated the market, surpassing $3.64 trillion in market cap on Thursday, making it the most valuable company globally. Combined, Nvidia, Microsoft, and Apple now exceed $10 trillion in market cap, garnering 44% of the Vanguard Information Technology ETF.
The tech sector has proven its resilience in the face of high inflation, supply chain difficulties, declining consumer spending, and other challenges. It is also at the forefront of artificial intelligence (AI). Despite its high price-to-earnings (P/E) ratio of 46.4, the Vanguard Information Technology ETF is still an attractive option for investors who seek low-cost entry into the market's leading companies.
2. Vanguard Consumer Discretionary ETF
The Consumer Discretionary ETF reached a new high, but not due to expectations you'd usually associate with. Top holdings such as Home Depot, Lowe's, McDonald's, and Starbucks all experienced a downturn following the election, possibly due to concerns about new policies like tariffs affecting companies with international exposure and potentially inflationary impacts on consumers.
However, the overall surge in the ETF can be attributed to its leading holdings — Amazon and Tesla. Despite being categorized as tech stocks, both Amazon and Tesla are actually part of the consumer discretionary sector. Both companies saw positive growth after their latest financial reports. Amazon boasts impressive revenue and profit growth and remains the industry leader in cloud computing. Tesla battles on, delivering solid earnings results, while having immense potential in autonomous vehicles, robotaxis, robotics, and more. However, Tesla's stock is expensive given the high operational expenses required for these efforts.
The Vanguard Consumer Discretionary ETF might be a good investment if you favor Amazon and Tesla. But due to the fund's wide range of stock holdings — from blue-chip dividend stocks to high-growth stocks — some investors may be better off selecting their preferred individual holdings instead of investing in the entire ETF.
3. Vanguard Communications ETF
The Vanguard Communications ETF is heavily weighted towards Alphabet, Meta Platforms, and Netflix. Other top holdings include telecom companies like Verizon Communications, AT&T, and T-Mobile, as well as more established media giants like Comcast. Unlike the tech or consumer discretionary sectors, communications is an intriguing bargain. The Vanguard Communications ETF sports a 25.7 P/E ratio, which is lower than the S&P 500 P/E ratio of 30.3. Despite being close to all-time highs, Alphabet's P/E is only 24, while Meta's is 28.
The communications sector tends to be sensitive to economic cycles, as a decrease in advertising spending may significantly impact Alphabet and Meta. Moreover, a decline in consumer spending could result in less demand for entertainment and streaming services. However, the Vanguard Communications ETF might be a worthwhile investment for investors looking for higher growth exposure but at a lower price point compared to tech or consumer discretionary sector ETFs.
4. Vanguard Financials ETF
Financials posted impressive gains on November 6, with the Vanguard Financials ETF surging 6.6% in a single session. Financials benefited from possible regulatory reductions, lenient merger and acquisition policies, and increased interest rates. A stumble in consumer spending would harm several banks and credit card companies, but this may be offset by higher business-to-business sales and dealmaking.
The Vanguard Financials ETF used to provide a yield of around 2.5%, but recent gains in the fund have pushed the yield down to 1.7%. While it's not outstanding, it still exceeds the market average of 1.2%.
Many financial institutions and insurance companies offer higher yields than the Vanguard Financials ETF. In contrast, a credit card company like Visa may provide a lower yield because it prioritizes growth and stock buybacks over yield opportunities. Some investors might prefer to target a particular industry or individual companies within the sector instead of opting for the Vanguard Financials ETF.
5. Vanguard Industrials ETF
Sectors like Industrials can potentially prosper with reduced regulations and beneficial policies for U.S. production and manufacturing, resulting in economic growth.
The Vanguard Industrials ETF stands out due to its extensive portfolio, comprising over 200 holdings, with no single investment exceeding 4% of the fund. This diversity enables exposure to various markets, such as industrial conglomerates, railways, defense manufacturers, agriculture, constructions, and more.
Vanguard Industrials ETF offers investors a mix of diversification and a balance between growth and value. Regrettably, the sector's robust performance has pushed the fund's yield all the way down to a meager 1.2%.
Adopt a prolonged perspective
Acquiring individual stocks or an entire market sector at record-high prices demands a long-term perspective. Jumping on a scorching sector or stock to make a quick buck is an excellent way to experience significant losses.
All five cited sectors were performing exceptionally well ahead of the election and have persisted to do so following the election, owing to speculated beneficial impacts on these businesses from the new administration in the near term. Unfortunately, many top investments have become increasingly costly. As the valuations climb, the pressure on companies to demonstrate earnings grows, and the potential volatility rises substantially if real results do not align.
After the election, investors showed interest in various sectors, leading to record highs for the Vanguard Financials ETF, with a 6.6% increase in a single session. This surge was likely due to expectations of regulatory reductions, lenient merger and acquisition policies, and increased interest rates. (finance, investing)
Investors should be aware that while the Vanguard Communication ETF currently has a lower P/E ratio than the S&P 500, the communications sector can be sensitive to economic cycles and decreases in advertising spending can significantly impact major players like Alphabet and Meta. (finance, money)
