It's been a great year for the S&P 500, with many top growth stocks and value stocks hitting all-time highs. But because growth stocks like Nvidia make up such a large share of the S&P 500 -- and have produced such strong gains -- exchange-traded funds (ETFs) that don't hold those names would have had a tough time beating 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 have combinations of quality top holdings and reasonable valuations that could position them to shine bright in 2025.
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1. Vanguard Dividend Appreciation ETF
This fund is unusual because it includes a blend of growth stocks and value stocks. And, unlike some dividend-centric funds that focus primarily on yields, this one tracks the S&P U.S. Dividend Growers Index, which includes only companies that have grown their payouts annually for at least 10 straight years. The index also excludes the highest-yielding 25% of companies that would otherwise be eligible for inclusion.
The fund's top five holdings are Apple, Broadcom, Microsoft, JPMorgan Chase, and ExxonMobil. While JPMorgan Chase and ExxonMobil have solid yields, Apple, Broadcom, and Microsoft have low yields in part because their stock prices have performed so well in recent years.
In this vein, the fund doesn't punish a company for having a low yield just because its stock price has performed well. It's also worth mentioning that Apple, Broadcom, and Microsoft all repurchase considerable amounts of their stock, which is another way for companies to pass profits back to shareholders.
Because it invests in companies from all sectors that regularly increase their dividends, the Dividend Appreciation ETF doesn't get too bogged down in stodgy, low-growth sectors. One drawback of some high-yield ETFs is that they can include companies that have high yields not because they've substantially raised 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 other's price gets cut in half, then at the end of that time (assuming both keep their payouts constant), the outperforming stock will have a yield of just 1% while the falling stock would have a yield of 6%. This illustrates how underperformance can turn a stock into a high-yielding investment, but that doesn't make such a stock a better all-around source of passive income.
The Dividend Appreciation ETF is well-suited for folks who view stocks' passive income potential as merely one aspect of an investment thesis rather than driving the bulk of it.
2. Vanguard S&P 500 Value ETF
The Vanguard S&P 500 Value ETF has 437 holdings, but outside of the top 100 or so holdings, each component makes up 0.25% of the fund or less. However, the top 10 holdings combined make up less than 20% of the fund, so it isn't overly top-heavy either.
A whopping 63% of the fund is in financials, healthcare, industrials, and consumer staples, whereas just 17.5% is in tech, consumer discretionary, and communications. By contrast, the Vanguard S&P 500 ETF, which tracks the S&P 500, has about half of its holdings in tech, consumer discretionary, and communications because of the enormous market values of Nvidia, Microsoft, Apple, Amazon, Tesla, Alphabet, and Meta Platforms.
Since it does not include any of those top growth stocks, and instead invests in value stocks, the Vanguard S&P 500 Value ETF will miss out on a lot of the upside potential of themes like artificial intelligence, software, hardware, automation, robotics, and social media. What investors get instead are a less expensive valuation and a better yield. The Vanguard S&P 500 ETF has a 30.3 price-to-earnings (P/E) ratio and a 1.3% yield compared to a 25.9 P/E ratio and a 2% yield for the Vanguard S&P 500 Value ETF.
The Vanguard S&P 500 Value ETF is a good buy if you want an investment that has less exposure to premium-priced sectors and a higher yield for boosting your passive income stream.
3. Vanguard Energy ETF
The Vanguard Energy ETF is designed to reflect the performance of the energy sector, which has put up 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 top-heavy: Just two stocks, ExxonMobil and Chevron, account for 36% of its portfolio value. But that level of concentration is arguably a good thing because of the volatility of the oil and natural gas industry.
ExxonMobil and Chevron sport elite balance sheets, and with their diversified business models, they do far 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 along their profits to shareholders through stock buybacks and growing dividend payouts.
One of the most attractive qualities of the Vanguard Energy ETF is its low P/E ratio of 8.5 and its yield of 3.3%. Across the industry, oil and natural gas companies have proven they can thrive even in the current mid-cycle price environment. A wave of consolidation has contributed to efficiency improvements and strong earnings growth.
The energy sector is cheap because it is prone to downturns, is capital intensive (which can strain corporate balance sheets), and because so many legacy companies in it are threatened by the clean energy transition and falling demand for fossil fuels and other products made from oil. But these risks are arguably already baked into the valuations of companies in the space.
By investing in this ETF, investors can get some diversification of risk across the sector, and also collect a sizable amount of passive income while benefiting from the upside potential of higher oil and natural gas prices.
Being mindful of market volatility
No one can know for sure what the S&P 500 will do in the near term. But we do know that investing in quality companies at reasonable valuations has historically been a winning long-term strategy. At the time of this writing, the S&P 500 is up by more than 57% since the start of 2023, while growth-focused ETFs like the Vanguard Mega Cap Growth ETF have more than doubled during that period.
The more extended the broader rally becomes, the more pressure is put on growth-driven companies to deliver exceptional results to justify their valuations. For example, last month, Nvidia stock sold off after the chipmaker reported its latest results -- even though it exceeded analysts' expectations and raised its guidance.
I fully believe that top growth companies will continue to deliver excellent results and lead the earnings growth of major indexes like the S&P 500, but I could see the market responding to even solid results with less enthusiasm. In other words, the valuations of those companies have gotten a little ahead of themselves, and the businesses will need time for their metrics to catch up. The good news is that a company like Nvidia is delivering unbelievable earnings growth, and its stock price is following that earnings growth. Until that changes, calling Nvidia a bubble stock would be unfair.
In the current environment, though, putting new capital to work in top funds that sport reasonable valuations -- funds like the Vanguard Dividend Appreciation ETF, Vanguard S&P 500 Value ETF, and the Vanguard Energy ETF, for example -- seems like a winning strategy, especially for investors looking for investments that are likely to be less volatile than the major indexes if there is 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, a former director of market development and spokeswoman for Facebook and sister to 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 has 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 Motley Fool has a disclosure policy.
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