3 ETFs That Can Double in 5 Years

Many groups of stocks that are not popular now can generate huge returns when interest rates fall. According to Motley Fool It is likely to double within five years if the Federal Reserve cuts interest rates.

Despite rising interest rates and recession fears, the stock market has continued to do well. Over the past year, the S&P 500 is up 24%. Much of that strong performance has come from a handful of large-cap growth stocks. Value stocks, small companies, and real estate investment trusts (REITs) have underperformed. Matt Frankel of The Motley Fool thinks that could change. Underperforming stocks could do great in the coming years. ETFs allow investors to take advantage of these market segments.

Catalysts are on the horizon

There are several reasons for the difference in performance between these groups of stocks. Consider the boom in artificial intelligence. But there is one important reason: interest rates.

Value stocks, small caps, and real estate stocks are typically more sensitive to interest rates than large caps. They are more dependent on external capital (debt) than large caps. Higher interest rates affect borrowing costs. Stocks in these three groups also often pay dividends (especially value stocks and real estate stocks). A lot of money has flowed out of the stock market and into risk-free assets in recent years, and these stocks have been the biggest victims.

If interest rates fall, these groups could benefit significantly. The Federal Reserve is expected to cut rates aggressively, starting in September. All three of these groups could be big winners.

Invest in all three groups via ETFs

Investors don’t have to buy individual value stocks, penny stocks or REITs to benefit from these developments. They can also do so through exchange-traded funds, and Frankel expects these funds to grow significantly over the next five years. The advantage of the ETF approach is that it combines low costs with broad exposure to the relevant category.

Bold predictions

Examples Frankel cites include the Vanguard Value ETF, the Vanguard Russell 2000 ETF, and the Vanguard Real Estate ETF. The Vanguard Value ETF holds 342 different stocks, with top holdings including Berkshire Hathaway, Broadcom, and JPMorgan Chase. The Russell 2000 ETF invests in 2,000 companies in the index, with no single one accounting for more than 0.41% of the fund’s assets.

The Vanguard Real Estate ETF offers exposure to more than 150 real estate investment trusts, with large positions in industry leaders like Prologis and American Tower. To double that investment over a five-year period, the ETFs would need to generate a total return of about 15% annually. That would be well above the long-term average of the S&P 500, which is between 9% and 10%. However, Frankel believes the valuation differential between these groups of stocks and the S&P 500, plus low interest rates, makes it certainly possible.