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Get Small To Go Big

Posted: Mar 13, 2009 13:38 PM by Gregory S. Davis

Tickers in this Article: VFH, VIS, VBR, C, WFC, GS, UTX, BA, VOE, VTV, URS, WTR, MS, GE

A more than 5% upward move of the Dow Jones Industrial Average (DJIA) in no way makes up for the 41% the index has fallen over the past year through March 10, but it does make sense for investors to take notice of how the market moved upward. Let's look at a group of low-expense Vanguard funds likely to follow the Dow's eventual move above 7,000.

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Financials
The Vanguard Financials ETF (NYSE:VFH) vaulted up 12.87% on March 10, bolstered by positive news concerning positive operating results for Troubled Asset Relief Program (TARP) recipient Citigroup (NYSE:C). The VFH fund also comprises other financials that have received TARP funds including Wells Fargo (NYSE:WFC), Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS). The TARP funding and the fluctuations of financials makes them a high-risk investment for individual investors who may be able to find equal returns with less risk elsewhere. The VFH fund has an expense ratio of 0.2%. (To learn more about the government's attempts to forestall a deep, extended recession, read Liquidity And Toxicity: Will TARP Fix The Financial System?)

Industrials
The Vanguard Industrials ETF (NYSE:VIS) closed out the day up 8.2%. Industrials are expected to be direct beneficiaries of the $787 billion American Recovery and Reinvestment Act. The Obama administration is focused on using the act's funds to create millions of jobs for infrastructure improvements of roads, buildings, bridges and green jobs. General Electric (NYSE:GE), a leading manufacturer of wind turbines, made up the largest portion of the fund at approximately 15% as of January 1. Other top VIS fund holdings include United Technologies (NYSE:UTX), which is in the midst of a massive job layoff, and Boeing (NYSE:BA), one of the U.S. government's top contractors. The VIS fund also has an expense ratio of 0.2%.

Small-Cap Value
The Vanguard Small-Cap Value ETF (NYSE:VBR) outpaced its Mid-Cap Value ETF (NYSE:VOE) and its Large-Cap Value ETF (NYSE:VTV) sister funds by closing up 7.84%. The VBR fund has the largest number of holdings at 977 among the group of funds mentioned, offering investors an opportunity for wide diversification in the small-cap asset class. Top holdings, including engineering and construction firm URS Corp. (NYSE:URS) and water management company Aqua America (NYSE:WTR), make up less than 1% of the fund. The VBR fund has the lowest expense ratio of the funds mentioned at 0.11%.

Final Thoughts
Diversity of investments and an eye on low expenses are just two strategies that investors should keep in mind before deciding to re-enter the market. The Dow's upswing does not likely mean that investors have missed their window of opportunity. If nothing else, investors may now have a slightly clearer outlook on how a future recovery could unfold.

Learn more about low expense ratios in Stop Paying High Mutual Fund Fees.

By Gregory S. Davis

Gregory S. Davis is the owner of G. Davis Capital, a Registered Investment Advisor with the state of North Carolina dedicated to providing independent investment research and education. His core methodology for choosing investments includes going against emotion eliciting headlines while focusing on asset diversification. G. Davis Capital also publishes the ETF education website, ETFReady.com . Gregory is a graduate of the Wharton School of Business and he has received an MBA from Bowie State University.

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