Why These 3 Vanguard ETFs Lagged the S&P 500 in 2024
Sunday, Dec 8, 2024 5:29 am ET
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In 2024, the S&P 500 has been on a tear, with many top growth and value stocks hitting all-time highs. However, not all exchange-traded funds (ETFs) have kept pace. The Vanguard Dividend Appreciation ETF (VIG), Vanguard S&P 500 Value ETF (VOOV), and Vanguard Energy ETF (VDE) have all underperformed the S&P 500 so far this year. Let's explore the reasons behind their lagging performance.
1. Sector compositions and market trends
The Vanguard Dividend Appreciation ETF (VIG) is a unique blend of growth and value stocks, focusing on companies that have consistently increased their dividends. While this strategy offers a stable income stream, it may not capture the same growth potential as pure growth stocks. Additionally, VIG's exclusion of high-yielding companies results in lower yields compared to other dividend-focused ETFs.
The Vanguard S&P 500 Value ETF (VOOV) focuses on value stocks, which typically have lower valuations and higher yields than growth stocks. While this approach offers a more conservative investment strategy, it may miss out on the growth potential of tech and consumer discretionary sectors, which have driven the S&P 500's performance in recent years.
The Vanguard Energy ETF (VDE) is heavily concentrated in energy stocks, with ExxonMobil and Chevron accounting for 36% of its portfolio value. While this top-heavy approach can amplify sector-specific gains, it also exposes the ETF to greater volatility. The energy sector's performance has been mixed in 2024, contributing to VDE's underperformance compared to the broader market.

2. Interest rates, inflation, and market sentiment
Interest rates and inflation play a significant role in the performance of equity ETFs. Higher interest rates make bonds more attractive, leading investors to shift funds from equity ETFs to bond ETFs. This shift can cause equity ETFs to underperform. Additionally, higher inflation erodes the purchasing power of investors, making it more difficult for them to invest in equities, which can also lead to underperformance.
Market sentiment is another crucial factor driving the performance of equity ETFs. In 2024, investors have been increasingly optimistic about the prospects of a Donald Trump victory in the upcoming election. This perception has led to a resurgence of the "Trump Trade," which favors sectors and assets expected to benefit from lower taxes and less regulation. This market trend may have contributed to the underperformance of VIG, VOOV, and VDE, as these ETFs have lower exposure to sectors favored by the Trump Trade, such as financials and energy.
3. Expense ratios, management fees, and market capitalizations
The expense ratios and management fees of the Vanguard ETFs can impact their performance relative to the S&P 500. The Vanguard Dividend Appreciation ETF (VIG) has an expense ratio of 0.06%, the Vanguard S&P 500 Value ETF (VOOV) has an expense ratio of 0.06%, and the Vanguard Energy ETF (VDE) has an expense ratio of 0.10%. These fees are lower than the average expense ratio of actively managed funds, which can help improve the ETFs' performance over time. However, the S&P 500 ETF (VOO) has an expense ratio of 0.03%, which is lower than the Vanguard ETFs mentioned. This could potentially impact the performance of these ETFs relative to the S&P 500, as lower fees can lead to better long-term performance.
The market capitalizations and liquidity of the underlying stocks in the Vanguard ETFs can also affect their performance. The Vanguard Dividend Appreciation ETF (VIG) and Vanguard S&P 500 Value ETF (VOOV) have a broader range of holdings, with median market capitalizations around $100 billion and $50 billion, respectively. This diversification can help mitigate risk and provide more stable performance. In contrast, the Vanguard Energy ETF (VDE) is top-heavy, with just two stocks, ExxonMobil and Chevron, accounting for 36% of its portfolio value. This concentration can lead to more volatile performance, as seen in the ETF's underperformance this year. Additionally, liquidity can affect an ETF's ability to track its underlying index and maintain its desired exposure. The Vanguard ETFs have high liquidity, with average daily trading volumes of over $1 billion, ensuring efficient trading and minimal tracking error. However, the liquidity of the underlying stocks can also impact the ETF's performance. For instance, less liquid stocks may be more susceptible to price manipulation and wider bid-ask spreads, which can negatively affect the ETF's performance.
In conclusion, the underperformance of the Vanguard Dividend Appreciation ETF (VIG), Vanguard S&P 500 Value ETF (VOOV), and Vanguard Energy ETF (VDE) in 2024 can be attributed to a combination of factors, including their sector compositions, market trends, interest rates, inflation, and market sentiment. While these ETFs may not have kept pace with the S&P 500 this year, their unique investment strategies and lower expense ratios make them attractive options for investors seeking a more conservative or income-focused approach. As always, it is essential to carefully consider your investment goals, risk tolerance, and time horizon when selecting ETFs or any other investment vehicles.