2 Vanguard ETFs to Buy Hand Over Fist and 1 to Avoid

If you're interested in investing in exchange-traded funds (ETFs), you'll want to put Vanguard's family of funds high on the list to consider. Vanguard is known for its low-cost funds. Over time, the lower expenses can lead to significantly higher returns.

While some Vanguard ETFs are great picks right now, others aren't. Here are two Vanguard ETFs to buy hand over fist and one to avoid.

Buy No. 1: Vanguard Long-Term Bond Index Fund

Arguably, the single most important factor to consider in selecting which Vanguard ETFs to buy right now is that the Federal Reserve is lowering interest rates. The last round of Fed rate cuts occurred four years ago. However, the Federal Reserve recently announced a hefty 0.5% reduction in interest rates and expects to make further smaller reductions.

The Vanguard Long-Term Bond Index Fund (NYSEMKT: BLV) should be a great ETF to buy in a falling-rate environment. As its name suggests, this ETF focuses on long-term bonds. It currently owns 3,130 bonds with an average effective maturity of 22.4 years.

Long-term bonds are more sensitive to interest rate cuts than shorter-term bonds. When interest rates fall, newly issued bonds will have lower yields than existing bonds. This makes the existing bonds more attractive to investors and usually drives their values higher.

Nearly half of the bonds held by the Vanguard Long-Term Bond Index Fund are issued by the U.S. government. The others are investment-grade corporate bonds with the highest concentration in those with A (high) and BBB (good) credit ratings.

The Vanguard Long-Term Bond Index Fund offers a 30-day SEC yield (an annualized yield based on the current market yield to maturity over a trailing 30-day period) of 4.69%. Like most Vanguard funds, it's inexpensive to own with an annual expense ratio of only 0.04%.

Buy No. 2: Vanguard Small-Cap Value ETF

The Federal Reserve's interest rate cuts don't only impact bonds; they affect stocks, too. Lower rates are great for companies of all sizes, but smaller companies often especially benefit from lower borrowing costs.

Lower interest rates can also cause investors to be more willing to take on higher risk levels. Since small-cap stocks are typically viewed as higher risk/higher reward alternatives than large-cap stocks, they can enjoy an extra boost when rates decline.

Vanguard offers several ETFs that focus on small-cap stocks. The Vanguard Small-Cap Value ETF (NYSEMKT: VBR) could be a great pick in the current environment. This ETF attempts to track the performance of the CRSP U.S. Small Cap Value Index, which includes stocks with relatively smaller market caps that are valued attractively.

The Vanguard Small-Cap Value ETF owns 847 stocks. The average price-to-earnings ratio of these stocks is 16, well below the 28.4 trailing earnings multiple for the S&P 500.

This Vanguard ETF's annual expense ratio is 0.07%. The average expense ratio of similar funds is 1.11%, based on data from Morningstar.

One to avoid: Vanguard Short-Term Bond ETF

The Vanguard Short-Term Bond ETF (NYSEMKT: BSV) isn't a bad ETF to own. However, in an environment where interest rates are falling, it's just not one of the best Vanguard funds to buy. Why? Although short-term bond prices usually rise when interest rates decline, they don't do so as much as longer-term bond prices.

This Vanguard ETF owns 2,751 short-term bonds with an average effective maturity of 2.8 years. The majority of the bonds in the Vanguard Short-Term Bond ETF's portfolio (69.2%) were issued by the U.S. government. Nearly all of the others are investment-grade corporate bonds.

The 30-day SEC yield for this Vanguard ETF is 3.8%, which is understandably lower than the yield for the Vanguard Long-Term Bond ETF. As was the case with its longer-term sibling, the annual expense ratio of the Vanguard Short-Term Bond ETF is a low 0.04%.

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Keith Speights has positions in Vanguard Small-Cap Value ETF. The Motley Fool has positions in and recommends Vanguard Bond Index Funds-Vanguard Short-Term Bond ETF. The Motley Fool has a disclosure policy.