VXF: U.S. SMID Caps Creeping Up Toward 2-Year Highs, ETF Remains A Bargain (NYSEARCA:VXF)

FactSet reported last week that the S&P 500 trades above 20 times forward operating earnings estimates for the first time in two years. After a demoralizing bear market in 2022 and a sharp rebound last year, it has been a wild ride. Bears suggest that the price being paid for US large caps is high. I assert that they can look to domestic SMID caps for a better deal.

I have a buy rating on the Vanguard Extended Market Index Fund ETF Shares (NYSEARCA:VXF). With S&P 400 and S&P 600 stocks carrying P/Es in the mid-teens, this diversified fund is ideal for long-term investors seeking value but still getting access to a handful of emerging growth companies. I will explain how that works later in the article.

US Small and Mid-Cap Stocks Sport Lower P/Es than Large Caps

According to Vanguard, VXF seeks to track the performance of a benchmark index that measures the investment return of stocks from small and mid-size companies. The fund provides a convenient way to match the performance of virtually all regularly traded US stocks except those in the S&P 500 Index and employs a passively managed approach, using index sampling techniques.

VXF is a large ETF with nearly $95 billion in total assets under management as of February 12, 2024. With much improved share-price momentum over recent months and an ultra-low 0.06% annual expense ratio, the ETF is an ideal vehicle to round out a portfolio of large caps. VXF holds US stocks away from the S&P 500, so there is a growth bent, leading to a relatively low 1.24% trailing 12-month dividend yield. Risk metrics are mixed given a somewhat high standard deviation, but there is ample diversification. Liquidity metrics, meanwhile, are quite strong given average daily volume of almost 500,000 shares and a 30-day median bid/ask spread of just 4 basis points, per Vanguard.

Looking closer into VXF’s portfolio, the 2-star, Bronze-rated fund by Morningstar plots toward the low end of the style box, indicating high exposure to US SMID caps. What is perhaps surprising is that most of the portfolio’s market cap is considered small cap in size, with nearly 40% being classified as growth. That mix might help offset most SMID-cap funds’ bias toward value stocks. What’s more, with a price-to-earnings ratio below 17, it’s a solid value compared to the SPX, which now trades above 20x forward EPS estimates.

VXF: Portfolio & Factor Profiles

VXF is a bit more diversified than the S&P 500, too. Just 22% of the fund is invested in the Information Technology sector (versus 28% for the SPX). A pair of value areas – Industrials and Financials – are the next two highest-weighted sectors. Biotech within the Health Care sector adds some risk and long-term growth potential to the fund.

Overall, the top 10 positions represent just 8% of VXF, with the possibility that some of its largest stocks could be called up to the S&P 500 before long. Uber (UBER) was a notable name that performed well after the announcement that it would be added to the SPX – VXF benefitted from its share-price rally. Snowflake (SNOW), CrowdStrike (CRWD), Workday (WDAY), KKR (KKR), Marvell (MRVL), and Block (SQ) are all names that could eventually make their way into the SPX if they continue to grow and produce profits.

Holdings & Dividend Information

Seasonally, VXF tends to undergo some volatility from mid-February through mid-March. In all, March is among the fund’s worst months of the year, but the April through August period has historically been bullish when analyzing Seeking Alpha’s new Seasonality tool.

VXF: Bearish Near-Term Seasonal Risks

The Technical Take

VXF has finally busted above a frustrating range (from the bulls’ perspective) in recent weeks. Notice in the chart below that shares struggled with key resistance in the $154 to $158 zone – the ETF failed at that range on three occasions from August 2022 through August of last year. Then, at long last, a strong late-2023 rally helped send the ETF to fresh highs dating back to the second quarter of 2022. After a mild correction from late December through January, VXF has rallied to yet another 22-month peak.

Based on the size of the previous range, an upside measured move price objective to the low $190s is now in play. I also spot key resistance in the low to mid-$170s – an area that was pivotal from early 2021 through Q1 of 2022. Still, with a rising long-term 200-day moving average and what appears to be some support provided by the shorter-term 50dma, trends have clearly improved with VXF. Finally, I like that the ETF hit technical overbought conditions late last year, consolidated, and is now rallying back.

Overall, the technical situation is encouraging as VXF rallied to highs not seen since early 2022.

VXF: Bullish Upside Breakout, Spotting Resistance Areas Above

The Bottom Line

I have a buy rating on VXF. The valuation is solid, while the fund’s approach to owning US stocks outside of the SPX provides some upside potential from stocks growing fast before they get so big that they are included in the S&P 500.