Vanguard Is "Cautious" on U.S. Growth Stocks. These 2 Value ETFs Could Be Smarter Buys for Long-Term Investors.

Is the artificial intelligence (AI) boom too good to last? Investors have recently questioned the high valuations of AI hyperscaler stocks. There has been turbulence in semiconductor stocks. Even if AI technology turns out to be transformative for the overall economy, there is concern among investors about whether the companies building AI tools are paying too much for uncertain return on investment.

A market outlook from Vanguard published on July 22 shows the investment firm optimistic about some U.S. stocks -- but less so about U.S. growth stocks. The outlook stated that Vanguard is "constructive on the shorter-term outlook for equities as the AI investment cycle deepens" but that Vanguard's "medium-term outlook is more cautious." The Vanguard outlook described U.S. growth stock valuations as "already stretched" and said that "we continue to prefer U.S. value stocks" for longer time horizons.

Vanguard's 10-year markets forecast also says that U.S. value stocks are expected to strongly outperform U.S. growth stocks. The company's research expects U.S. value stocks to deliver average annual returns of 6.4% to 8.4%, while U.S. growth stocks are expected to deliver only 3.6% to 5.6%.

No investment company's research is 100% guaranteed to be correct. Future returns are unpredictable. But if you agree with Vanguard's general assessment that value stocks might be undervalued -- and ready to outperform growth stocks -- then here are two value stock ETFs that might be worth considering for your portfolio.

Image source: Getty Images.

Vanguard U.S. Value Factor ETF (VFVA): 666 stocks, five years of 12.4% annualized returns

The Vanguard U.S. Value Factor ETF (NYSEMKT: VFVA) offers a diversified portfolio of 666 value stocks, including large-cap, mid-cap, and small-cap companies. The fund is actively managed, so it charges a slightly higher expense ratio than most Vanguard funds, at 0.13%.

This fund's top five holdings are Salesforce, making up 0.88% of the fund; Bristol-Myers Squibb, 0.85%; EOG Resources, 0.83%; Intuit, 0.82%; and General Motors, 0.79%. Other stocks in the fund's top 10 holdings include household names AT&T, Pfizer and Verizon Communications. Many of these are companies that you've heard of but that Vanguard's fund managers believe the stock market has undervalued.

The fund has delivered impressive recent returns. Its annualized returns by net asset value are about 12.4% in the past five years, 16.2% in the past three years, and 35.4% in the past year.

Vanguard Morningstar Small-Cap Value ETF (VBR): 840 stocks, five years of 9.75% annualized returns

The Vanguard Morningstar Small-Cap Value ETF (NYSEMKT: VBR) is another way to invest in undervalued companies. This fund offers a diversified portfolio of 840 value stocks, but unlike the other fund, it holds only small caps. And Vanguard's research also predicts that for the next 10 years, U.S. small-cap stocks will earn average annual returns of 4.7% to 6.7%, slightly outperforming U.S. large-cap stocks, 4.1% to 6.1%.

Because of the emphasis on smaller companies, most of this fund's top stock holdings are not household-name brands -- although the top 10 holdings include Williams-Sonoma and Moderna. If you're concerned that growth-stock ETFs have become too top-heavy with highly valued tech names, this fund could diversify your money into different parts of the economy. Its top four sectors are:

• Industrials: 20.8% of the fund
• Financials: 18.1%
• Consumer discretionary: 14.6%
• Real estate: 10.2%

This small-cap value fund has underperformed the other ETF. The Vanguard Morningstar Small-Cap Value ETF has delivered average annual returns by net asset value of 9.75% for the past five years, 14.3% for the past three years, and 25.75% in the past year. Its expense ratio is a bit lower, at 0.05%.

Why buy VBR or VFVA?

I don't own either of these value stock ETFs, but I am sympathetic to Vanguard's argument. Large-cap tech stocks that have powered the AI trade are already highly valued; for those growth stocks, the biggest gains from the AI boom might already be priced in. In that case, buying value stocks and small-cap stocks could be a better move for the long-term future.

Beyond valuations, there's another reason to be bullish on value stocks. If AI delivers broad boosts to productivity, lots of different companies and industries might benefit. That would be good news for undervalued stocks.

The biggest profit gains from AI might not go to major tech names. Instead, they might go to regional banks, manufacturing companies, logistics firms, and all kinds of smaller companies in other sectors that haven't gotten the brightest spotlight from investors in the past few years. These small-cap value stocks might be ready to shine.

If I had to choose one of these funds, I would go with the Vanguard Morningstar Small-Cap Value ETF. It best fits the strategy outlined in Vanguard's research, and might be a better bet for a future where smaller value stocks outperform large-cap growth.

Ben Gran has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb, Intuit, Moderna, Pfizer, Salesforce, and Williams-Sonoma. The Motley Fool recommends EOG Resources, General Motors, and Verizon Communications. The Motley Fool has a disclosure policy.