Vanguard Expects Value Stocks and Bonds to Outperform Amid Economic Tailwinds]

Vanguard Market Outlook: Value Stocks and Bonds Positioned for Growth

Recent Vanguard research is bullish on the U.S. economy. The company’s recent market commentary, published in June, projects 3% U.S. GDP growth in 2027, along with lower core inflation of 2.7%, which could benefit both U.S. stocks and bond prices.

The company’s research indicates that value stocks in the U.S. could be particularly attractive. These companies are poised to benefit from artificial intelligence (AI) productivity gains without bearing the up-front costs of AI data centers and capital expenditures (capex).

Vanguard U.S. Value Factor ETF (VFVA): 649 stocks, eight years of 10.6% annualized returns

The Vanguard U.S. Value Factor ETF is an actively managed fund that invests in U.S. stocks with lower market valuations relative to their fundamentals. The portfolio of 649 stocks includes large-cap, mid-cap, and small-cap value stocks. The fund gained 12.9% in the first half of the year and 28.1% over the past year, outperforming the S&P 500 index.

This fund is well-diversified by sector. For investors concerned that typical S&P 500 ETFs have become overly concentrated in major tech stocks, the Vanguard U.S. Value Factor ETF offers exposure across broader segments of the economy. The fund’s top five sector holdings are financials (23.5% of the fund), consumer discretionary (18.5%), healthcare (14.7%), technology (12.6%), and industrials (10.7%).

The ETF is also well-diversified across its holdings of value stocks, without being top-heavy with just a few names. The portfolio’s top five stock holdings are:

The fund charges an expense ratio of 0.13%, which is higher than many low-cost Vanguard ETFs, but still quite low for an actively managed fund. And it pays decent dividends, with a trailing 12-month yield of 1.93%. Value stocks don’t always beat the market. For the past eight years, since this fund was established in February 2018, it has delivered average annual returns of 10.6%, significantly underperforming the S&P 500:

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^SPX data by YCharts

But this value stock ETF’s future could be bright. Its price-to-earnings (P/E) ratio at recent prices is 11, which is a significant discount to the S&P 500 index’s P/E multiple around 25.

Vanguard Total Bond Market ETF (BND): More than 11,000 bonds, 3.1% annualized returns for 19 years

Despite challenging years for bond investors, the Vanguard Total Bond Market ETF has delivered a return near 4% over the past year. While the past few years have presented difficulties for bond investors, with only a 0.1% average annual return for the past five years, the long-term performance has been stronger. From the fund’s inception in April 2007 through June 30, this bond ETF has delivered average annual returns of 3.1% and a 3.7% return in the past year.

This is an ultra-low-cost bond ETF with an expense ratio of 0.03%, and it holds a well-diversified portfolio of 11,455 bonds, with a broad mix of U.S. government bonds and corporate bonds. If Vanguard’s research projections are correct and inflation (and interest rates) decline over the next few years, that could be positive news for investors who buy bonds today.

No one knows for sure which sectors, stocks, assets, or ETFs will outperform in the future. But if investors believe that productivity (and profit) gains from the AI boom will spread throughout the economy, and that interest rates could come down from today’s levels, this value stock ETF and low-cost bond ETF could be solid choices for a long-term investor’s diversified portfolio.

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