What Is the Vanguard Small-Cap Value ETF, and Should You Buy It?

The most successful stocks of the next 10 years might not be the biggest names. According to recent Vanguard research, U.S. value stocks and small-cap stocks are expected to outperform U.S. growth and large-cap stocks. The investment firm's researchers believe that the biggest economic benefits from the artificial intelligence (AI) era might ultimately go to smaller companies.

Here's what Vanguard's model projects for annualized returns in the next 10 years:

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There's no guarantee that any investment company's research will be 100% correct. But if you agree with the general strategy that today's smaller companies and overlooked stocks might be better investments during the next 10 years, you might want to buy the Vanguard Small-Cap Value ETF (NYSEMKT: VBR). Let's look at this value stock exchange-traded fund (ETF) and see if it's worth adding to your portfolio.

The Vanguard Small-Cap Value ETF owns a total of 835 stocks with a median market cap of $10 billion each. This is a diversified fund that makes it easy to own hundreds of small U.S. value companies at an ultra-low expense ratio of 0.05%.

The fund's top holdings by sector include industrials (21.5% of the fund), financials (18.1%), consumer discretionary (13.9%), technology (9.6%), and real estate (9.5%). This value ETF has delivered a total return (by net asset value) of 27.01% in the past year, about on par with the S&P 500.

Over the longer term, this value ETF has strongly underperformed the S&P 500. Since its inception in January 2004, the Vanguard Small-Cap Value ETF has delivered an average annual return of 9.51%. The S&P 500 has delivered total returns of 904.5% since this fund was launched.

Small-cap stocks don't always underperform the market. Sometimes they outperform large caps for a long time. For example, from 2010 to 2017, the Vanguard Small-Cap Value ETF delivered total returns of 156%, outperforming the S&P 500, which gained 132.9%.

Small caps may be at the start of another market cycle in which they outgrow big-name companies. And if Vanguard's research projections are correct, small caps might be some of the best investments for several years to come.

If you're a long-term investor who believes in the future growth potential of small-cap value stocks, the Vanguard Small-Cap Value ETF could be a good buy.

Before you buy stock in Vanguard Small-Cap Value ETF, consider this:

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Ben Gran has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

What Is the Vanguard Small-Cap Value ETF, and Should You Buy It? was originally published by The Motley Fool