The Smartest Value ETF to Buy With $500 Right Now

Key Points

• The stock market tends to swing between extremes.

• Right now, the S&P 500 index is being driven by growth stocks.

• Investors who think long term will probably want to start adding more value into the mix with an ETF like Vanguard Value Index ETF.

• 10 stocks we like better than Vanguard Index Funds - Vanguard Value ETF ›

In 2000, the market was trading near all-time highs and was being driven higher by technology stocks. Until it wasn't, and the stock market crashed back down, with a difference between growth and value stocks on clear display.

If you are worried about the growth bias in the market today, Vanguard Value ETF (NYSEMKT: VTV) could be a good place to park $500, or more, right now.

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The market goes through cycles

Although not a perfect example because they were created just after the 2000 market peak, the divergent performance of SPDR Portfolio S&P 500 Growth ETF (NYSEMKT: SPYG) and SPDR Portfolio S&P 500 Value ETF (NYSEMKT: SPYV) during the dot-com bust is very illuminating. As the chart highlights, after Wall Street fell into a bear market, value outperformed growth.

SPYG data by YCharts.

This, however, isn't uncommon at all. The market is driven by emotions, and investors tend to swing from overly optimistic to overly pessimistic. When investors are in a good mood, growth tends to lead the S&P 500 (SNPINDEX: ^GSPC) higher. When investors are in a dour mood, value stocks tend to be the better performers in the S&P 500 index.

Right now, growth is leading the way, with technology stocks a particular interest among investors. If you fear that the market, which is again near all-time highs, is getting a bit frothy, it makes sense to consider a more value-oriented approach.

Image source: Getty Images.

Vanguard Value ETF is a great choice

The two SPDR ETFs noted are adequate options if you are looking to shift between growth and value. However, there's an important limitation: They only choose stocks from the S&P 500 index. That is a committee-selected list of large and economically important U.S. companies. There's always some bias in the selection process and, right now, there's an important comparison point between SPDR Portfolio S&P 500 Value ETF and Vanguard Value ETF that makes the Vanguard exchange-traded fund (ETF) more attractive.

Technology makes up about 25% of SPDR Portfolio S&P 500 Value ETF's holdings. The tech sector only accounts for around 7% of Vanguard Value ETF. That means that, despite being a value ETF, SPDR Portfolio S&P 500 Value ETF is still heavily weighted toward one of the market's hottest sectors.

That's a by-product of the focus on just S&P 500 stocks, but it shouldn't be ignored if you are trying to find an investment that will zig when the market zags. For reference, technology is about 34% of the broader S&P 500 index.

So what is Vanguard Value ETF doing differently? While it is large cap-focused, it isn't limited to the companies in the S&P 500 index. That gives it more leeway in selecting stocks for inclusion.

This methodology difference has also resulted in the Vanguard Value ETF having a bit more of a value tilt. The average price-to-book value ratio for the ETF is 2.8x, compared to 3.2x for SPDR Portfolio S&P 500 Value ETF.

Go with value to hedge your bets

Investors are all-in on growth today, which is why contrarian investors will likely want to start leaning into value. Given the history of the market swinging between the growth and value investment styles, that makes logical sense, regardless of whether you have $500 or $5,000 to invest.

And if you do want to put some money in value, Vanguard Value ETF has more of a value bias than SPDR Portfolio S&P 500 Value ETF. Since they both have about the same number of holdings and the same expense ratio, that gives Vanguard Value ETF the easy edge.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Index Funds - Vanguard Value ETF. The Motley Fool has a disclosure policy.