Vanguard has a very large collection of exchange-traded funds (ETFs), with choices that should appease just about any investor. One ETF that will fit in almost any portfolio is the Vanguard S&P 500 ETF (VOO 0.55%). However, the Vanguard S&P 500 Value ETF (VOOV 0.61%) could be the best ETF to invest in right now if you have $1,000 burning a hole in your pocket.
Here’s what you need to know.
Vanguard S&P 500 ETF is the common choice
The S&P 500 (^GSPC 0.53%) index is a curated list of roughly 500 U.S. companies. It is meant to represent the U.S. economy. The stocks in the index are weighted by market cap, so the largest companies have the greatest impact on the overall performance of the index. If you are looking to track the market, Vanguard S&P 500 ETF is probably one of the best choices you have, noting that it has a tiny expense ratio of 0.03%.
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But if you already have some broad market exposure in your portfolio, which might already come from an S&P 500 index tracking investment, you might want to do something a little different with new cash you invest. This is where a look at Vanguard S&P 500 Growth ETF (VOOG 0.47%) and Vanguard S&P 500 Value ETF comes in. Over the past few years, the former has been the growth-focused alternative that has driven the broader index higher.
The difference between growth and value
There’s no rocket science here; Vanguard S&P 500 Growth ETF looks at sales growth, the ratio of earnings change to price and momentum when selecting stocks for the ETF. A small number of large growth stocks have been driving the broader S&P 500 index higher in recent years, and that is clear when you graph this ETF against the entire index and Vanguard S&P 500 Value ETF.
Data by YCharts.
But there’s a small problem that might bother some investors. The average price-to-earnings ratio and price-to-book value ratio of Vanguard S&P 500 ETF are 27.7 and 4.9, respectively. For Vanguard S&P 500 Growth ETF, those figures are 34.6 and 9.4, respectively. The growth-focused version of the S&P 500 is looking really expensive right now.
This elevated valuation is why investors might want to add a little more value to their portfolios with Vanguard S&P 500 Value ETF. The average P/E ratio of this value ETF is 22.7 and the average P/B ratio is 3.2. This value ETF variant is created by looking at “the ratios of book value, earnings and sales to price.” While a P/E ratio of 22.7 isn’t exactly low, it is well below the broader index and the growth-focused ETF option. The same story is true of the P/B ratio. Vanguard S&P 500 Value ETF is very clearly living up to its goal, even though the market as a whole is rather expensive right now.
Time to err on the side of value
The market tends to move like a pendulum, swinging from one extreme to another over time. After such a long period in which growth has led the way, it seems like it might be a good time to err on the side of value. While it probably isn’t a great idea to shift entirely into Vanguard S&P 500 Value ETF, if you have some new money to put to work, you might want to tilt things in the value direction. And Vanguard S&P 500 Value ETF lets you do that easily and fairly cheaply, as both this ETF and Vanguard’s growth variant have 0.1% expense ratios.
