Index funds are an increasingly popular way for anyone from beginners to seasoned investors to put their money to work in the financial markets.
Just like previous years, 2023 saw investors pile trillions of dollars into index funds and ETFs. Vanguard, which created the first index fund almost 50 years ago, saw investors add over $155 billion to its ETFs alone this year, far surpassing any other fund company. And there are still about two weeks left to go.
Here are three of the top Vanguard ETFs investors are buying and the one I'd buy for 2024.
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1. Vanguard 500 ETF
The Vanguard 500 ETF (VOO 1.07%) is Vanguard's biggest ETF, with about $360 billion of assets under management. That got a substantial boost in 2023, and not just because the underlying index, the S&P 500, is up about 23% this year. Investors added $39.8 billion to the fund in net inflows.
There's a lot to love about the Vanguard 500 ETF. It has an expense ratio of just 0.03%. So, for every $1,000 you invest in the fund, you'll pay just $0.30 in fees. Meanwhile, the fund managers do an excellent job of tracking the S&P 500 and keeping taxes and fees low.
For exposure to large-cap stocks, the Vanguard 500 ETF is about as simple as it gets. And that makes it a great choice for ETF investors.
2. Vanguard Total Bond Market ETF
The Vanguard Total Bond Market ETF (BND -0.29%) became the first of its class to reach $100 billion in assets under management. That was propelled by $16.2 billion of net inflows from investors this year.
The bond market has rallied into the end of the year, as positive economic data and comments from the Federal Reserve indicate we should see meaningful rate cuts in 2024. As interest rates go down, bond prices go up. And even the expectation of interest rate cuts from the Fed will send current bond yields lower.
The Vanguard Total Bond Market ETF tracks the Bloomberg U.S. Aggregate Bond Index. The index tracks intermediate-term investment-grade debt, including corporate bonds, government bonds, mortgage-backed securities, and asset-backed securities. That gives investors broad exposure to the bond market.
That said, investors looking to diversify their stock holdings with bonds may find the heavy weighting of corporate bonds is much more correlated with their stocks than they'd prefer. That's one reason many investors opted to buy another Vanguard bond ETF.
3. Vanguard Intermediate-Term Treasury ETF
The Vanguard Intermediate-Term Treasury ETF (VGIT -0.29%) didn't see quite as much investor interest as Vanguard's biggest bond index fund. Investors added $7.5 billion to the fund in 2023. But what makes that particularly notable is that the ETF only has $21.1 billion in assets under management -- about one-fifth of the Total Bond Market ETF.
As the name implies, the Vanguard Intermediate-Term Treasury ETF invests in intermediate-term Treasury bonds maturing in three to 10 years. Treasuries don't offer yields quite as high as corporate bonds, which explains why the ETF's yield is slightly lower. In return, however, investors will find that Treasury prices are historically less correlated with stock price movements. That can be much more important for overall portfolio returns than a few basis points of additional yield.
Treasuries are typically seen as a safe haven for investors amid economic uncertainty. That can help protect a portfolio against a recession, as the debt is backed by the U.S. government. Bonds backed by a corporation can easily become worthless if the company goes bankrupt. Amid the current economic environment, it's no surprise investors are piling into Treasuries.
Even if you don't think we're headed for a recession in 2024, the Vanguard Intermediate-Term Treasury ETF is a smart way to diversify your stock portfolio while Treasury yields remain high.
But I'd still add one more ETF to the bunch.
The one Vanguard ETF worth adding for 2024
While a portfolio consisting of a large-cap fund like the Vanguard 500 and a Treasury bond fund like the Intermediate-Term Treasury ETF is a good start, you may also want exposure to a sector of the market that went unloved in 2023.
Small-cap value stocks have historically outperformed large-cap stocks in the long run. However, very few investors saw much reason to invest in a small-cap value fund like the Vanguard Small-Cap Value ETF (VBR 0.14%) in 2023.
There are valid reasons for that. Economic uncertainty isn't kind to small companies. The same factor that drove investors to Treasuries in 2023 is the same reason they fled small caps. If we enter a recession, small-cap stocks are far less likely to survive than a company that's made it into the S&P 500.
Another reason small-caps underperformed this year is that they're far more susceptible to interest rates. The reason is twofold. First, many small-cap stocks fund their growth through debt. If interest rates climb, their interest expense climbs, and their earnings power goes down. The second is that when interest rates climb, the present value of future earnings goes down due to investors using a higher discount rate.
But the tide is turning. Investors are increasingly confident that interest rates will come down relatively quickly in 2024. And small-cap stocks have performed extremely well in the recent market rally driven by that optimism. Still, it's not too late to add small-cap stocks to your portfolio.
Adding the Vanguard Small-Cap Value ETF to your portfolio for 2024 is one of my favorite ways to diversify a basic ETF portfolio.
Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Bond Index Funds-Vanguard Total Bond Market ETF and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
