While Jerome Powell recently told lawmakers that interest rates will likely rise more than previously expected, a recession still might be avoidable given the robust economic conditions. Amid this backdrop, investing in ETFs Vanguard Developed Markets Index Fund (VEA) and Vanguard Mortgage-Backed Securities Index Fund (VMBS) could be wise for impressive returns.
Inflation cooled to 6.4% over the past year in January, down from 6.5% in December. It marked the seventh consecutive year-over-year slowdown and was far lower than the peak of 9.1% in June last year. The Fed opted for a quarter percentage point hike in its benchmark interest rate at the latest FOMC meeting, marking the smallest increase since March 2022.
With the economy's resilience, even higher-than-expected interest rate hikes may not lead to a recession. Treasury Secretary Janet Yellen has expressed confidence in the economy’s ability to achieve a soft landing, owing to its robust labor market and the absence of balance sheet issues.
Given this backdrop, let’s discuss why VEA and VMBS could be ideal investments this year.
Vanguard Developed Markets Index Fund (VEA)
Launched and managed by The Vanguard Group, Inc., VEA delivers outstanding coverage of developed-market equities outside the United States. The fund’s portfolio comprises Canadian and small-cap stocks. It tracks the performance of the FTSE Developed All Cap ex U.S. Index using the full replication technique.
With $107.41 billion in assets under management (AUM), VEA’s top holding is Nestle S.A (NSRGY) which has a 1.54% weighting in the fund. It is followed by Vanguard Cash Management Market Liquidity Fund at 1.43% and ASML Holding NV (ASML) at 1.24% weighting. The fund has a total of 4064 holdings. It has a beta of 0.87.
VEA has an expense ratio of 0.05%, lower than the category average of 0.40%. Its net inflows came in at $2.23 billion over the past three months and $4.84 billion over the past six months. The ETF’s NAV was $45.01 as of March 6, 2023.
VEA pays an $1.26 annual dividend, yielding 2.41% at the prevailing price level. Its four-year average dividend yield is 2.94%. The fund has gained 4.5% over the past three months and 7.6% year-to-date to close the last trading session at $45.06.
VEA’s POWR Ratings reflect its strong outlook. The ETF’s overall A rating equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
VEA has an A grade for Trade and Buy & Hold. It has topped the A-rated 80-ETF European Equities ETFs group. Click here to see all of VEA’s POWR Ratings.
Vanguard Mortgage-Backed Securities Index Fund (VMBS)
VMBS is also launched and managed by The Vanguard Group, Inc. The fund makes investments in U.S. fixed-income markets. It has exposure to the three major agencies: Fannie Mae, Freddie Mac, and Ginnie Mae. VMBS uses MBS TBAs as liquid alternatives to the MBS rather than holding actual MBS pass-throughs.
VMBS has $14.59 billion in AUM. It has 3457 holdings in total. The U.S. Dollar has a 13.62% weighting in the fund as its top holding, followed by UMBS TBA 30yr 2% November Delivery 2.000% 01-MAR-2051 at 4.60%, UMBS TBA 30yr 2% October Delivery 2.000% 01-DEC-2049 at 3.58% and UMBS TBA 30yr 2.5% October Delivery 2.500% 01-JUN-2049 at 3.46%.
The ETF’s net inflows were $926.44 million over the past six months and $1.97 billion over the past year. In addition, its 0.04% expense ratio compares favorably to the 0.31% category average. VMBS NAV was $45.37 as of March 6, 2023. It has a beta of negative 0.03.
The ETF pays a $0.71 dividend annually, yielding 1.34% at the current price level. Its four-year average dividend yield stood at 2.06%. VMBS marginally gained year-to-date to close the last trading session at $45.42.
It’s no surprise that VMBS has an overall rating of B, equating to a Buy in our proprietary rating system. The ETF also has a B grade for Buy & Hold.
Within the Intermediate-Term Bond ETFs group, it is ranked #10 out of 49 ETFs. Click here to access all the POWR Ratings for VMBS.
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VEA shares were trading at $44.27 per share on Tuesday afternoon, down $0.79 (-1.75%). Year-to-date, VEA has gained 5.48%, versus a 4.20% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
2 Best ETFs to Buy and Hold in 2023 StockNews.com
