Classic exchange-traded funds (ETFs) are almost always a good investment. Your money will probably grow over time if invested in the SPDR Dow Jones Industrial Average ETF Trust(NYSEMKT: DIA) or the Vanguard S&P 500 ETF(NYSEMKT: VOO). Their long-term returns will probably put even the best savings and money market accounts to shame, unless you’re getting started just before a steep market crash. Even then, time is your friend, and the market-tracking index funds should deliver strong returns in the long run.
That said, a more focused approach to ETFs can be helpful from time to time. For example, I picked up a few shares of the Vanguard Information Technology Index Fund ETF(NYSEMKT: VGT) in the spring of 2022, because technology stocks looked undervalued at the time. That turned out to be a good idea, as the artificial intelligence (AI) boom kicked off just a few months later. Vanguard’s technology-focused fund has been crushing the more popular index funds from then to Jan. 7, 2025:
VGT Total Return Price data by YCharts
But that fund may be running out of steam these days. I’m not sure how much longer it will outperform the broader market, given the extreme valuation ratios seen in this fund’s largest components. So I’m not buying more of the Vanguard IT fund right now, and might even trim my position a little bit to take advantage of lower-priced alternatives.
One of my favorite ideas in January 2025 is the Vanguard Mega Cap Value ETF(NYSEMKT: MGV). Let me show you why this could be the perfect time to grab a few shares in this paragon of value and stability.
I’m glad the Mega Cap Value ETF didn’t end up in my portfolio 31 months ago. Its total return over that span stopped at 31%, far below the general market and the undervalued ETF I actually selected.
Things have changed, though. At this point, the soaring share prices of the “Magnificent Seven” stocks have thrown the leading market trackers off-balance.
The Magnificent Seven names account for 34.3% of the S&P 500(SNPINDEX: ^GSPC) index value right now. The average price-to-earnings ratio (P/E) in this group is a hefty 46.4. The average Magnificent Seven stock trades at 8.8 times sales (P/S), or 45.2 times free cash flow (P/FCF).
The numbers never tell the whole story, and I agree that these tech giants have earned their lofty valuations the hard way. Their AI expertise and other high-growth operations have resulted in soaring financial results, and there should be more to come in the next few years.
However, the sky-high valuations suggest that a lot of the upcoming business growth may have been priced into their stocks already. So the Vanguard S&P 500 fund or the Information Technology ETF (with 45% of its assets invested in just three of the Magnificent Seven stocks today) could be great for growth investors who don’t mind stretched valuations as long as there’s a boom going on. But the technology-heavy funds aren’t bargain-bin value plays anymore.
That’s where the Mega Cap Value Fund comes in.
The Magnificent Seven stocks are a part of this portfolio too, but to a much smaller degree. None of them are listed among the fund’s 10 largest holdings. Instead, the fund focuses on lower-priced business giants across a diverse set of industries.
Here are the five largest holdings in this value-oriented ETF:
Stock
Industry
Market Cap
Share of ETF Holdings
JPMorgan Chase
Banking and financial services
$690 billion
4%
Berkshire Hathaway Class B
Diversified insurance conglomerate
$981 billion
3.4%
UnitedHealth Group
Health insurance
$472 billion
3.2%
ExxonMobil
Energy
$481 billion
2.9%
Home Depot
Home improvement retail
$383 billion
2.4%
Data source: Collected from Yahoo! Finance and double-checked against official ETF records on Jan. 7, 2025.
No single stock or industry dominates this diversified fund. Technology stocks currently account for 11.6% of the portfolio’s total value, giving a heavier 25.2% weight to financial services and 18.9% to healthcare stocks. It’s a large ETF with $8.3 billion under management, spread over 136 different stocks.
The average P/E ratio in this fund’s top 10 holdings is a perfectly reasonable 23.2. The average price-to-sales of 2.3 is pretty modest. P/FCF? That stops at merely 21.1.
This fund really is what it says on the box. Its components are large and value-priced, to an unusually large degree. The ETF also comes with a 2.3% annual dividend yield.
The Vanguard Mega Cap Value ETF may not have delivered market-beating returns in recent years, but it may be ready to turn the tables. And if you’re not impressed by the fund’s past performance, you might still appreciate its low volatility and generous dividends.
This solid ETF could be the bedrock of a value-oriented portfolio for the long haul. Its core components just might beat the Dow Jones(DJINDICES: ^DJI) and S&P 500 trackers from today’s modest valuations.
So if you have $500 to invest today, I’d recommend checking out the Vanguard Mega Cap Value ETF before the usual range of classic ETF options.
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JPMorgan Chase is an advertising partner of Motley Fool Money. Anders Bylund has positions in UnitedHealth Group, Vanguard S&P 500 ETF, and Vanguard World Fund – Vanguard Information Technology ETF. The Motley Fool has positions in and recommends Berkshire Hathaway, Home Depot, JPMorgan Chase, and Vanguard S&P 500 ETF. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.
The Smartest Vanguard ETF to Buy With $500 Right Now was originally published by The Motley Fool
Alisha Hunter is a news writer for Credence Advisors-News. She's been writing for over a decade, and she has taught herself all the skills she needs to be successful in this role.
Alisha has written about everything from technology to fashion; she's even written an advice column for brides-to-be!
Alisha loves reading books and watching movies - she's currently working on a book club with her friends where they read one book each month together!
