It was a great year for S&P500with many growth and value stocks hitting all-time highs. But as growth stocks like Nvidia represent such a large part of the S&P500 — and produced such large gains — exchange traded funds (ETFs) that don't hold these names would have struggled to beat the S&P 500 this year.
THE Vanguard Dividend Appreciation ETF(NYSEMKT:VIG), Vanguard S&P 500 Value ETF(NYSEMKT:VOOV)and the Vanguard Energy ETF(NYSEMKT:VDE) have all underperformed the S&P 500 so far in 2024. But they all combine high-quality stocks and reasonable valuations that could position them to shine brightly in 2025.
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This fund is unusual because it includes a mix of growth stocks and value stocks. And unlike some dividend-centric funds that focus primarily on returns, this one tracks the S&P US Dividend Growers Index, which includes only companies that have increased their distributions every year for at least 10 consecutive years. The index also excludes the top 25% of companies with highest returns that would otherwise be eligible for inclusion.
The fund's top five holdings are Apple, Broadcom, Microsoft, JPMorgan ChaseAnd ExxonMobil. While JPMorgan Chase and ExxonMobil have strong returns, Apple, Broadcom and Microsoft have weak returns, in part because their stock prices have performed very well in recent years.
With this in mind, the fund does not punish a company for having a low return simply because its stock price has performed well. It is also worth mentioning that Apple, Broadcom and Microsoft buy back considerable amounts of their shareswhich is another way for companies to pass on their profits to shareholders.
Because it invests in companies across sectors that regularly increase their dividends, the dividend appreciation ETF doesn't get too bogged down in heavy, low-growth sectors. One drawback of some high-yield ETFs is that they may include companies that have high yields not because they have significantly increased their payouts, but because their stock prices have underperformed.
For example, imagine two stocks that both yield 3%. If one stock triples in five years while the price of the other is halved, then at the end of that period (assuming both stocks keep their payments constant), the outperforming stock will have a return of just 1 %, while the falling stock will have a return of 1%. yield of 6%. This illustrates how underperformance can turn a stock into a high-yielding investment, but it doesn't make such a stock a better overall source of passive income.
The dividend appreciation ETF is well suited for people who view the passive income potential of stocks as just one aspect of an investment thesis rather than the driving force behind the bulk of it.
The Vanguard S&P 500 Value ETF has 437 holdings, but outside of the top 100 holdings, each component represents 0.25% of the fund or less. However, the top 10 holdings combined make up less than 20% of the fund, so it's not too top-heavy either.
A whopping 63% of the fund is devoted to the financial, healthcare, industrials and consumer staples sectors, while only 17.5% is devoted to technology, consumer discretionary and communications . On the other hand, the Vanguard S&P 500 ETFwhich tracks the S&P 500 Index, has about half of its holdings in technology, consumer discretionary and communications due to the huge market values of Nvidia, Microsoft, Apple, Amazon, Tesla, AlphabetAnd Metaplatforms.
Since it doesn't include any of these high-growth stocks and instead invests in value stocks, the Vanguard S&P 500 Value ETF will miss out on much of the upside potential of themes like intelligence artificial, software, hardware, automation, robotics and social networks. What investors get instead is a cheaper valuation and a better yield. The Vanguard S&P 500 ETF has a price-to-earnings (P/E) ratio of 30.3 and a yield of 1.3%, compared to a P/E ratio of 25.9 and a yield of 2% for the ETF Vanguard S&P 500 Value.
The Vanguard S&P 500 Value ETF is a good buy if you want an investment with less exposure to high-priced sectors and a higher yield to increase your passive income stream.
The Vanguard Energy ETF is designed to reflect the performance of the energy sector, which has seen decent gains this year, but not as strong as the S&P 500.
Unlike the Dividend Appreciation ETF or the S&P 500 Value ETF, the Energy ETF is very heavy: only two stocks, ExxonMobil and Chevronrepresent 36% of the value of its portfolio. But this level of concentration is arguably a good thing because of the volatility of the oil and gas industry.
ExxonMobil and Chevron boast elite balance sheets, and with their diversified business models, they do much more than just produce oil and natural gas. They both have growing low-carbon divisions that invest in various technologies, such as carbon capture and storage and low-carbon fuels. They also pass on their profits to shareholders through share buybacks and increasing dividend payouts.
One of the most attractive qualities of the Vanguard Energy ETF is its low P/E ratio of 8.5 and yield of 3.3%. Across the sector, oil and gas companies have proven that they can thrive even in the current mid-cycle pricing environment. A wave of consolidation has contributed to efficiency improvements and strong profit growth.
The energy sector is cheap because it is prone to downturns, is capital-intensive (which can strain company balance sheets), and because many traditional companies are threatened by the clean energy transition and falling demand for fossil fuels and other products made from these energies. oil. But these risks are undoubtedly already integrated into the valuations of companies in the sector.
By investing in this ETF, investors can achieve some risk diversification in the sector and also earn a significant amount of passive income while benefiting from the upside potential of higher oil and natural gas prices.
No one can know for sure what the S&P 500 will do in the short term. But we know that investing in quality companies with reasonable valuations has always been a winning long-term strategy. As of this writing, the S&P 500 is up more than 57% since the start of 2023, while growth-oriented ETFs like the Vanguard Mega Cap Growth ETF more than doubled during this period.
The longer the recovery extends, the more pressure is placed on growth-oriented companies to deliver exceptional results to justify their valuations. For example, last month, Nvidia shares sold off after the chipmaker reported its latest results, even though it beat analysts' expectations and raised its guidance.
I believe high-growth companies will continue to generate strong results and lead the earnings growth of major indexes like the S&P 500, but I could see the market reacting to even strong results with less enthusiasm. In other words, the valuations of these companies have gotten a little ahead and it will take time for their indicators to catch up. The good news is that a company like Nvidia is generating incredible earnings growth, and its stock price is tracking that earnings growth. Until that changes, it would be unfair to call Nvidia a bubble.
In the current environment, however, investing new capital in blue-chip funds with reasonable valuations – funds like the Vanguard Dividend Appreciation ETF, the Vanguard S&P 500 Value ETF, and the Vanguard Energy ETF, for example – seems like a good idea. winning strategy. , particularly for investors looking for investments that may be less volatile than major indices in the event of a stock market sell-off in 2025.
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JPMorgan Chase is an advertising partner of Motley Fool Money. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, Chevron, JPMorgan Chase, Meta Platforms, Microsoft, Nvidia, Tesla, Vanguard Dividend Appreciation ETF, and Vanguard S&P 500 ETF. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Mad Motley has a disclosure policy.
