Chet Currier wrote a worthwhile article on bloomberg.com about how large-cap stocks, despite low valuations, still have not turned around and performed well, whereas small stocks continue to outpace the market. This is the kind of thinking that indicates to me that it is time to buy large cap value stocks. In the long run, what drives stock returns is valuations. If you take a look at Vanguard’s various index funds, you will see that the large cap value fund has an average P/E of 14, versus average P/Es above 19 for mid- and small-cap value funds. In a perfectly efficient market, large cap stocks should have somewhat higher valuations than small stocks because they tend to be less risky.
So if you want an easy investment right now, invest in Vanguard’s VIVAX (large-cap value) fund, or the equivalent ETF, VTV. Then just hold on to that for the next 5 years and watch as you outperform the market.
I do not discuss growth index funds, because value is always going to be a better bet over the long term.
Large-Cap Index Funds and their P/E ratios
- S&P 500 index fund (VFINX) – 17.0
- Dividend Appreciation index fund (VDAIX) – 17.7
- FTSE Social index fund (VFTSX) – 18.5
- Growth index fund (VIGRX) – 21.2
- Large-Cap index fund (VLACX) – 17.3
- Total Stock Market index fund (VTSMX) – 17.9
- Value index fund (VIVAX) – 14.7
Mid/Small Cap Index Funds and their P/E ratios
- Extended Market index fund (VEXMX) – 23.2
- Mid-Cap index fund (VIMSX) – 19.5
- Small-Cap Growth index fund (VISGX) – 26.5
- Small-Cap index fund (NAESX) – 22.5
- Small-Cap Value index fund (VISVX) – 19.7
Disclosure: I own shares of VIVAX, I love Vanguard, and my disclosure policy has a P/E of 8.