Well-chosen exchange-traded funds (ETFs) can help you earn sizable profits from the stock market. But these funds can be even more lucrative if you can buy them before a powerful catalyst sends their shares sharply higher.
For example, real estate and small-cap companies have historically been superb long-term investments. That's likely to remain true for many years to come. And now could be a particularly good time to invest in these fortune-building asset classes. Here's why.
Why you should invest in real estate
Stubbornly high inflation and the Federal Reserve's policies to tame it took a heavy toll on the residential and commercial real estate industries. Yet with price increases finally moderating, the Fed may soon be able to roll back its interest rate hikes. The $120 trillion U.S. real estate market could thus be on the verge of its long-awaited rebound.
Rate cuts typically lead to lower mortgage rates, which make purchasing a home more affordable. At the same time, cheaper financing costs make it easier for businesses to expand. Reduced borrowing costs also tend to make real estate investments more profitable.
The Vanguard Real Estate ETF (VNQ -1.00%) provides investors with a simple way to capture this upside. The fund owns equity stakes in more than 150 real estate companies. Many of these businesses could see their profits soar if interest rates decline.
The ETF focuses on real estate investment trusts (REITs) that buy and hold commercial or residential properties. Examples include industrial sites, data centers, office buildings, healthcare facilities, retail stores, telecom towers, apartments, and storage units. Prologis, Digital Realty Trust, Simon Property Group, Welltower, Realty Income, American Tower, and Public Storage are among the fund's major holdings.
REITs must pass at least 90% of their profits on to their shareowners via dividends each year. The Vanguard Real Estate ETF's dividend yield, in turn, stands at roughly 3% today. These quarterly cash payments could provide you with a reliable source of passive income.
Moreover, the ETF has a modest expense ratio of 0.13%. That amounts to $1.30 per $1,000 invested annually. The fund also has a minimum investment of just $1, so you don't need a lot of money to get started.
Why you can expect big returns from small businesses
Rate cuts could also turbocharge the profits of small-cap and mid-cap companies, which often depend on borrowed money to scale their operations. The Vanguard Russell 2000 ETF (VTWO -1.48%) is an excellent way to own a piece of these lucrative asset classes.
Vanguard's ETF held positions in almost 2000 small- and mid-cap stocks as of May 31. These businesses are growing their earnings at an impressive annual pace of 16% on average.
Better still, the fund's holdings are priced attractively, with an average price-to-earnings (P/E) ratio of 16.2. That places the ETF's price-to-earnings-to-growth (PEG) ratio at just slightly above 1. Investing in rapidly expanding businesses at such reasonable valuations should put you in a strong position for wealth-building returns.
The ETF's annual expense ratio of just 0.1% means nearly all potential gains flow into your investment account rather than the fund company's coffers. And like the Vanguard Real Estate ETF, the Vanguard Russell 2000 ETF's minimum investment of only $1 makes it accessible to almost all investors.
