No one has the ability to accurately predict the future, of course. That certainly applies to investments.
However, you can project how much your initial investment will become based on an assumed rate of return and your intended holding period.
If you were to invest $1,000 in the Vanguard Value Index Fund ETF (VTV 1.03%), how much would you have after five years?
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A deeper look at the ETF
This exchange-traded fund (ETF), with nearly $190 billion in assets as of May 31, is popular with investors. But let’s have an overview, because it’s advisable to understand the ETF before investing any money.
The Vanguard Value Index Fund ETF tracks the CRSP US Large Cap Value Index, which includes 330 companies with a median market capitalization of more than $130 billion. The ETF has more than half of its funds invested in the financial (22.9%), industrial (16.2%), and healthcare (14.3%) sectors.
As the name suggests, it seeks to include value stocks rather than growth stocks. You can see this by comparing the price-to-earnings (P/E) ratio since that’s a common valuation metric. At the end of May, the stocks in the index and ETF had an average P/E ratio of 18.9 versus 37.2 for the Vanguard Growth ETF.
Past returns
Growth stocks have vastly outperformed value stocks over various time periods. The Vanguard Value Index Fund ETF returned 13.9% over the last five years through May 31. During this time, the Vanguard Growth ETF returned an annualized 17.1%.
Notably, since both invest passively, tracking their respective indexes, they have low fees. The Vanguard Growth ETF has an expense ratio of just 0.04%, or $4 annually per $10,000 invested. That’s much lower than the average expense ratio of 0.88% for similar funds, according to Vanguard. The expense ratio is an important consideration for investors. The lower the ratio, the more money investors get to keep. That translates into a higher return.
With knowledge about the ETF’s stock composition, fees, and past returns, it’s time to look at future rates of return.
Projecting investment totals
As the well-worn saying goes, past performance is no guarantee of future results. Still, it’s a good base assumption that you can adjust upward and downward.
If the fund returns the same 13.9% over the next five years, your $1,000 investment would grow to about $1,917. That’s nearly doubling your initial stake.
With the economic uncertainty amid geopolitical tensions and the uncertain effects of global economies, it seems prudent to model a lower rate of return. Assuming a 5% annualized return over the next five years, that $1,000 would turn into $1,276. That’s not a much higher return than the roughly 4% yield you could get on the risk-free U.S. Treasury’s five-year note.
What if the ETF matched the previous five years’ growth ETF return? After all, while growth stocks have done well lately, that doesn’t mean they’ll continue to outpace value stocks. In that scenario, your initial $1,000 investment would more than double to $2,202. And, under a very optimistic scenario, if the ETF returns 25% per year, you’d more than triple your funds to $3,052.
Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Index Funds-Vanguard Growth ETF and Vanguard Index Funds-Vanguard Value ETF. The Motley Fool has a disclosure policy.
