VXF - VXF: The Anti-Large-Cap Trade

2023-11-17 11:18:48 ET

Summary

• Vanguard Extended Market Index Fund ETF Shares provides diversified investment opportunities in the mid and small-cap segment of the U.S. equity market.
• The VXF ETF has underperformed the S&P 500, making it a potential rotation opportunity for investors.
• The ETF offers a well-diversified portfolio with low concentration risk and a lower weighting in the technology sector compared to large-cap funds.

It's been a large-cap, market-cap weighted cycle clearly, but all cycles change, and all conditions change. That's why Vanguard Extended Market Index Fund ETF Shares ( VXF ) is worth talking about. This is an exchange-traded fund, or ETF, which provides a broad exposure to the mid and small-cap segment of the U.S. equity market, making it a compelling option for those looking for diversified investment opportunities. It has massively underperformed the S&P 500 (SP500), which is why it may be exactly the time to consider rotating here.

Designed to track the performance of the S&P Completion Index, VXF was launched on December 27, 2001. Since its inception, the ETF has amassed assets over $14 billion, making it one of the larger ETFs attempting to match the mid-cap blend segment of the U.S. equity market. The ETF employs a passively managed, full-replication strategy and remains fully invested, offering investors a diversified exposure to growth and value stocks across various sectors. With an annual operating expense of 0.06%, VXF is among the cheaper products in the space, making it a cost-effective choice for investors.

ETF Holdings: A Closer Look

VXF's portfolio consists of 3,647 stocks, with the top five holdings accounting for just 4.5% of the total net assets. This signals a well-diversified portfolio with low concentration risk.

VXF is also well-diversified across various sectors, offering a balanced investment opportunity.

It's noteworthy that compared to large-cap or an S&P 500 ETF such as SPY, the technology sector holds a smaller weighting in VXF, offering a different risk-reward balance for investors.

Note also that VXF is overweighted in small-cap stocks.

Peer Comparison: How Does VXF Stand Out?

When evaluating the performance of VXF, it's useful to compare it against other market caps. This includes the SPDR® S&P 500 ETF Trust ( SPY ) on the large-cap side, the Vanguard's Mid Cap ETF ( VO ) on the mid-cap side, and the iShares Core S&P Small-Cap ETF ( IJR ). It's clear that VXF lagged because of the small-cap exposure it has. This emphasizes the point that a view on market cap exposure is a critical decision point for asset allocation.

Pros and Cons of Investing in VXF

Like any investment, VXF comes with its own set of pros and cons. The benefits include a low expense ratio, broad diversification, and exposure to the growth potential of mid and small-cap stocks. However, the ETF also carries certain risks. For one, the prices of mid and small-cap stocks often fluctuate more than those of large-cap stocks, leading to increased volatility. Furthermore, the ETF's heavy concentration in the technology sector may not resonate with investors bearish on this sector.

Conclusion: To Invest or Not to Invest?

Vanguard Extended Market Index Fund ETF Shares is a good fund to consider if you're bearish on market-cap weighted, large-cap technology driven market averages. It offers a lower concentration of tech stocks compared to large-cap funds or the S&P 500 index, and greater sectoral diversification, which can help mitigate risk. Just be aware that a bet here is largely a bet on small-cap stocks, which have been a challenged part of the marketplace for a decade. Not a bad thing - just something to consider.

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