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This Vanguard ETF Is a No-Brainer Buy Right Now

Motley Fool - Mon Apr 8, 4:50AM CDT

If you threw a dart at a list of Vanguard ETFs, it would probably land on one that will deliver solid long-term returns. That's just how good Vanguard's funds tend to be. However, some Vanguard ETFs are better picks than others.

I think the Vanguard Energy Index Fund ETF(NYSEMKT: VDE) especially stands out as a winner with the current market dynamics. Here are five reasons why I think this Vanguard ETF is a no-brainer buy right now.

1. Oil prices are likely to go up

As its name indicates, the Vanguard Energy Index Fund ETF focuses on the energy sector. It owns 115 energy stocks. Its top five holdings -- ExxonMobil, Chevron, ConocoPhillips, Schlumberger, and EOG Resources -- make up over half of the fund's assets.

The Vanguard Energy Index Fund ETF's price rises when oil prices rise. Morgan Stanley analyst Martijn Rats predicts oil prices will increase more than expected this summer.

Why? For one thing, the International Energy Agency has raised its 2024 oil demand forecast. Meanwhile, OPEC+ extended its voluntary production reductions through the end of the second quarter. Rats noted a slowdown in U.S. shale supply, along with "wobbly" starts to the year for production in Brazil and Canada.

Occidental Petroleum President Vicki Hollub expects a supply shortage by late 2025. She doesn't think oil companies are replacing crude reserves quickly enough to keep up with global demand. If she's right, the prospects for the Vanguard Energy Index Fund ETF should be bright for several years to come.

2. Attractive valuation

Is the increasing possibility that oil prices will rise already priced into the valuation of the Vanguard Energy Index Fund ETF? Nope.

The average price-to-earnings ratio of the stocks in the ETF is only 10.5. This is cheap, especially considering the companies owned by the fund have delivered average annual earnings growth over the last five years of 26.7%.

3. Great dividends

Companies in the energy sector tend to pay great dividends. The Vanguard Energy Index Fund ETF's top five holdings offer dividend yields between 2% and 4.1%. Many other stocks owned by the ETF also pay attractive dividends.

Unsurprisingly, the ETF has a 30-day SEC dividend yield of 2.67%. With this nice yield supplementing price appreciation for the fund as oil prices rise, I expect the Vanguard Energy Index Fund ETF will deliver exceptional total returns over the next few years.

4. Beating the S&P 500

Speaking of exceptional total returns, the Vanguard Energy Index Fund ETF is handily beating the S&P 500 so far in 2024.

Granted, this outperformance doesn't necessarily mean the Vanguard Energy Index Fund ETF will continue to top the S&P 500. However, momentum can sometimes be a good indicator of future returns.

5. Low expense ratio

High expenses can eat into your returns significantly over the long term. However, low costs are a hallmark of Vanguard funds.

The Vanguard Energy Index Fund ETF has a low annual expense ratio of 0.10%. The average annual expense ratio of similar funds is 1.02%, based on data from Morningstar.

Should you invest $1,000 in Vanguard World Fund - Vanguard Energy ETF right now?

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Keith Speights has positions in Chevron and ExxonMobil. The Motley Fool has positions in and recommends Chevron and EOG Resources. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.

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