The stock market had an excellent year in 2023, with the S&P 500 rebounding sharply after a difficult 2022. However, the performance hasn’t been great across the board. Small-cap stocks have underperformed their larger counterparts, some sectors haven’t rebounded nearly as much as the overall stock market, and a lot of the 2023 gains in the S&P 500 were fueled by a handful of massive companies.
Because of these facts, there could be some excellent opportunities for patient investors to put money to work. Here are three ETFs I’m buying (or planning to buy) in my retirement account this year, and why I’m a fan of each one.
Vanguard Russell 2000 ETF
Small-cap stocks have underperformed the S&P 500 significantly in recent years. The Russell 2000 benchmark index gained 7 percentage points less than the S&P 500 in 2023 and has already underperformed through the first couple of weeks of 2024.
However, small caps could be some of the biggest beneficiaries of falling interest rates, which is widely expected to happen this year. This may be especially true if a U.S. recession can be avoided. Small cap valuations relative to the S&P 500 are at their lowest point in 25 years, and this could be a big opportunity over the next several years and beyond.
I’m planning to invest in small caps through a low-cost index fund — specifically, the Vanguard Russell 2000 ETF (NASDAQ: VTWO) — which has a minimal 0.10% expense ratio.
Vanguard Real Estate ETF
Real estate has been one of the worst-performing stock market sectors recently, which isn’t a surprise. After all, real estate investment trusts (REITs) are highly sensitive to rising interest rates.
But that’s one big reason REITs could be set to outperform in 2024, and I’ve been buying shares of the Vanguard Real Estate ETF (NYSEMKT: VNQ) to take advantage of the opportunity. Rates are widely expected to drop, and if the Fed can achieve its so-called “soft landing” in the economy, it could be a big catalyst for commercial real estate.
I already own several REITs in my portfolio, but most of them are relatively small companies. As a weighted index fund, the Vanguard Real Estate ETF gives me lots of exposure to the leading REITs without having to choose individual stocks to buy.
Invesco S&P 500 Equal Weight ETF
The Invesco S&P 500 Equal Weight ETF (NYSEMKT: RSP) is the only non-Vanguard ETF on my buy list in 2024. (To be fair, if Vanguard offered a similar ETF, I’d probably buy it.)
The benchmark S&P 500 index is a weighted index, which means that larger companies make up a disproportionate share of the performance. In other words, a stock with a $1 trillion market cap has 10x the influence on the S&P than one with a $100 billion market cap. In recent years, as some of the big tech companies have climbed into the trillion-dollar club, this has made the index rather top-heavy, or highly dependent on the performance of just a few big companies.
The Invesco S&P 500 Equal Weight ETF allocates an equal percentage of its capital to all 500 companies in the index, so the performance of relatively small companies like PNC Financial matters just as much as that of Apple or Microsoft.
The ETF has a very reasonably 0.2% expense ratio and a solid history of long-term performance. In fact, while the S&P 500 Equal Weight Index underperformed the weighted S&P in 2023, it has outperformed the popular benchmark over the long run.
Excellent long-term opportunities
To sum it up, all three of these ETFs could be excellent opportunities for long-term investors at the current level, especially considering the current high-interest-rate environment and top-heavy stock market performance we’ve seen over the past year or so. Investors shouldn’t expect a smooth ride up, but I’m putting my own money into these three ETFs in 2024 as a major component of my retirement planning.
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Matthew Frankel, CFP® has positions in Vanguard Specialized Funds-Vanguard Real Estate ETF. The Motley Fool has positions in and recommends Apple, Microsoft, PNC Financial Services, and Vanguard Specialized Funds-Vanguard Real Estate ETF. The Motley Fool has a disclosure policy.
3 Top ETFs I’m Buying in 2024 That Could Help Me Retire a Multimillionaire was originally published by The Motley Fool
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