With the stock market near record highs, it may look as if there are no opportunities. But the best investors can find opportunity in any market condition.
Investing in exchange-traded funds (ETFs) that track a specialized segment of the stock market that's poised to take off is a savvy move. You don't have to worry about hand-selecting individual stocks. Instead, you get a basket of securities that track a benchmark index. You get greater diversification, and you can invest based on the broader economic trends you foresee.
Vanguard has some of the lowest-cost ETFs around. Here are three that should be on your radar if you're an opportunistic investor.
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Vanguard Financials ETF (VFH)
A year ago, the picture was bleak for the financial industry. The Fed had just slashed interest rates to nearly zero, and lower interest rates meant lower lending profits. Massive job losses led banks to tighten lending standards and hoard cash in anticipation of widespread defaults.
But after a rotten 2020, the financial sector has been a star performer so far in 2021. That's why savvy investors should consider the Vanguard Financials ETF (VFH 0.12%). Year to date, the ETF is up more than 28%, while the is up about 11%.
The fund is broadly diversified across the financial sector with 408 holdings, the majority of which are banks. Its largest holdings include JPMorgan Chase (JPM 0.04%), Berkshire Hathaway (BRK.A -0.33%) (BRK.B 0.40%), and Bank of America (BAC 0.81%).
Investors in the Vanguard Financials ETF should benefit from continued economic recovery since the financial sector tends to be cyclical. Moreover, default rates have been much lower than anticipated, so banks are sitting on plenty of cash. The sector also got a recent vote of confidence from the Fed, which will lift restrictions on stock buybacks and dividend payments for institutions that pass the next round of stress tests.
The Vanguard Financials ETF is a good way to invest in a sector that will likely continue to soar as the economy recovers. The fund has an ultra-low expense ratio of 0.1%. That means just $1 of a $1,000 investment goes toward fees.
Vanguard Real Estate ETF (VNQ)
Like the financial sector, commercial real estate had a dismal 2020. But as the U.S. moves toward a broad reopening, the Vanguard Real Estate ETF (VNQ -0.48%) presents an opportunity for investors who want to diversify with real estate without buying physical property.
The Real Estate ETF invests in real estate investment trusts (REITs), which are like mutual funds that invest in real estate instead of stock. It has 174 REITs in its portfolio and an expense ratio of just 0.12%.
The fund has exposure to some of the segments of the commercial real estate market hit hardest by the pandemic, like retail (10%), office buildings (7.5%), and hotels and resorts (3.4%), but many of its largest holdings were relatively insulated. For example, its 10 largest holdings include REITs that focus on cell tower properties, data centers, and storage facilities.
The fund has outperformed the S&P 500 so far in 2021, with prices up nearly 15%, compared to the S&P's 11% increase. However, while the S&P 500 index is up about 23% from the pre-pandemic highs it reached in February 2020, the Vanguard Real Estate ETF is still down about 2% -- so there's still some opportunity there.
One unique appeal of REITs for investors is that they're reliable sources of dividend income. That's because they're legally required to pay out 90% of their taxable income as dividends to shareholders. With a 3.24% 12-month yield, the Vanguard Real Estate ETF presents a good opportunity for retirees seeking investment income.
However, even investors who don't plan to retire for decades could benefit from snatching up this fund and putting it in a tax-advantaged account, like a Roth IRA. Reinvesting those dividends without owing taxes will add serious growth to a portfolio over time.
VFH data by YCharts.
Vanguard Health Care ETF (VHT)
A final sector opportunistic investors should consider in 2021 is healthcare. The Vanguard Health Care ETF (VHT -0.21%) invests in an index of 445 U.S. healthcare stocks, with a dirt cheap expense ratio of 0.1%.
Its largest concentrations are in healthcare equipment (24%), pharmaceuticals (23.9%), and biotechnology (18.5%). Its top holdings include Johnson & Johnson (JNJ 1.07%), UnitedHealth Group (UNH 2.64%), and Pfizer (PFE 4.22%).
The fund has underperformed the S&P 500 year to date, with prices up just over 6.5% in 2021. But in the long term, there are plenty of reasons for optimism about the healthcare sector: An aging population will require more medical care, plus demand for elective procedures that people put off due to pandemic fears will likely surge. Also, the super-slim majority that Democrats now hold in Congress has generally been viewed positively by investors, as a sweeping overhaul to the healthcare system seems unlikely.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Citigroup is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Robin Hartill, CFP owns shares of Vanguard REIT ETF. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Vanguard REIT ETF. The Motley Fool recommends Johnson & Johnson and UnitedHealth Group and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short June 2021 $240 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
