If we asked a Magic 8 Ball whether the Federal Reserve will cut interest rates in September, I'm pretty sure the answer would be "signs point to yes" or maybe even "most likely." At least, those would be the answers if the Magic 8 Ball were functioning correctly.
Many economists and investors are expecting a rate cut next month as the minutes from the latest Federal Reserve meeting indicate that lower interest rates are on the way.
What should investors do if a Fed rate cut does occur? Here are three Vanguard exchange-traded funds (ETFs) to buy hand over fist.
1. Vanguard Long-Term Bond ETF
When interest rates fall, bond prices rise. And the prices of long-term bonds rise more than shorter-term bonds. This makes sense. Rate cuts spur institutional investors and income investors to buy bonds that pay higher yields for the longest amount of time. This buying pressure drives the prices of the bonds higher.
There's one Vanguard ETF that's ideal for taking advantage of this inverse correlation between interest rates and bond prices: the Vanguard Long-Term Bond ETF (NYSEMKT: BLV). This ETF currently owns 3,095 long-term bonds.
How long-term are we talking about? The average effective maturity of the bonds in the ETF is 22.5 years. Nearly half of the bonds are issued by the U.S. government.
Vanguard funds are known for their low costs. The Vanguard Long-Term Bond ETF doesn't disappoint on that front. Its annual expense ratio if only 0.04%, a fraction of the 0.83% average expense ratio of similar funds.
2. Vanguard Real Estate ETF
Long-term bonds aren't the only beneficiaries of lower interest rates. The share prices of real estate investment trusts (REITs) also typically increase as rates decline. These companies rely on borrowing to fund the purchases of new properties, and lower rates can translate to increased profitability.
The Vanguard Real Estate ETF (NYSEMKT: VNQ) allows investors to buy 155 REIT stocks in one fell swoop. The median market cap of these REITs is $32 billion. The ETF's top holdings include Vanguard Real Estate II Index Fund (a Vanguard mutual fund), Prologis, American Tower, Equinix, and Welltower.
One big plus for this Vanguard ETF is its high forward dividend yield of roughly 4%. REITs must return at least 90% of their earnings to shareholders as dividends and this gives the Vanguard Real Estate ETF plenty of income to distribute each quarter.
Another advantage of the ETF is its annual expense ratio of 0.13%. Although this is higher than the Vanguard Long-Term Bond ETF's cost, it's still much lower than the 1.07% average for similar real estate funds.
3. Vanguard Small-Cap Value ETF
Small-cap stocks also tend to move higher when interest rates decline. Like REITs, smaller businesses often must borrow money to fund their growth. Lower rates can therefore boost the profitability of small-cap companies.
Vanguard offers several small-cap funds. I especially like the Vanguard Small-Cap Value ETF (NYSEMKT: VBR). This ETF tries to track the performance of the CRSP US Small Cap Value Index, which features stocks with relatively low market caps and valuations.
The Vanguard Small-Cap Value ETF currently owns 848 stocks. The average price-to-earnings ratio for these stocks is 15.6, significantly lower than the earnings multiple of nearly 27.5 for the large-cap stocks in the S&P 500.
You won't pay through the nose to own this Vanguard ETF, either. Its annual expense ratio is 0.07% compared to an average expense ratio of 1.11% for similar funds.
Should you invest $1,000 in Vanguard Long-Term Bond ETF right now?
Before you buy stock in Vanguard Long-Term Bond ETF, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Vanguard Long-Term Bond ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $758,227!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
See the 10 stocks »
*Stock Advisor returns as of August 22, 2024
Keith Speights has positions in Vanguard Small-Cap Value ETF. The Motley Fool has positions in and recommends American Tower, Equinix, Prologis, and Vanguard Real Estate ETF. The Motley Fool recommends the following options: long January 2026 $180 calls on American Tower, long January 2026 $90 calls on Prologis, and short January 2026 $185 calls on American Tower. The Motley Fool has a disclosure policy.
3 Vanguard ETFs to Buy Hand Over Fist if the Fed Cuts Rates in September was originally published by The Motley Fool