Market Downturn: 2 Top ETFs to Buy on Dips to Create Serious Wealth

Investors can enjoy serious wealth creation by accumulating units in small- or mid-cap ETFs in this bear market!

| More on:
ETF chart stocks

Image source: Getty Images

Market downturns can be uncomfortable for investors to ride through. On the flip side, it’s also an opportunity. For example, the last market crash during the pandemic witnessed a drop of more than 30% in the Canadian and U.S. stock markets. And from the lows of 2020 to earlier this year, both markets doubled investors’ money!

It’s impossible to guess the bottom of a market correction or peak of a market. Fortunately, you don’t need to buy at the bottom or sell at the peak to make good money. For example, if you’d bought at the midpoint of the 2020 market crash and held until 2022, you could have made at least 50% on price appreciation, which is a substantial gain.

Small-cap stocks can create even greater wealth than the general market on a bear market recovery and then some. Having said that, investing in individual small-cap stocks is super risky. That’s where exchange-traded funds (ETFs) come in. What’s an ETF? They make it easy for investors to invest by providing diversified exposure to the market or a specific area of the market at a low cost. So, I recommend investors take a closer look at Vanguard Small Cap Growth Index Fund (NYSEMKT:VBK).

Small-cap ETFs

Here’s a quick comparison of the S&P 500 ETF (or SPY) and the Vanguard Small Cap Growth Index Fund since the pandemic market crash. Notice that in the last market recovery, the small-cap growth ETF exceeded the returns of the U.S. market, using the SPY as a proxy. However, it has also fallen harder in the current market decline.

VBK Total Return Level Chart

SPY and VBK Total Return Level data by YCharts for an initial investment of $10,000

You probably never heard of VBK ETF’s holdings. In fact, a bunch of them will cease to exist 10 years from now. However, it wouldn’t stop the fund from outperforming just because a big basket of small-cap businesses always grows faster than large caps.

If an investor bought a small-cap stock and it goes bankrupt, it’d probably be a total loss for the investor. However, it wouldn’t matter if some VBK holdings disappear, because new small-cap stocks with great potential will take their places in the fund. The small-cap growth ETF is, indeed, diversified. At the end of April, it had 751 holdings with none exceeding 0.80% of the fund. The fund is diversified across sectors as well, including approximately 21% in technology, 19% in healthcare, 18% in industrials, 16% in consumer discretionary, and 9% in real estate.

This fund is not going away. It tracks the performance of the CRSP US Small Cap Growth Index. And it has a long history with its inception in 2004. Its net assets of about $28.7 billion are also considerably large.

Mid-cap ETFs

If you just can’t place your confidence in small-cap stocks, you can get the best of both worlds — the stability of larger-cap stocks and higher growth of smaller-cap companies — from mid-cap ETFs. Interestingly, the mid-cap ETFs shown below have all held up better than SPY in this period. One could argue that it’s because the mid-cap ETFs have experienced greater gains when the market was going up.

SPY Total Return Level Chart

SPY, IJH, MDY, and VOE Total Return Level data by YCharts for an initial investment of $10,000

The Foolish investor takeaway

The cloudy crystal ball doesn’t tell us when the market will bottom. So, it would be smart for investors to build a position over time. Always ensure you have some dry powder on hand. And, of course, have a long-term focus to benefit from the inevitable market recovery for lucrative price gains.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends Vanguard Small-Cap Growth ETF. Fool contributor Kay Ng has no position in any of the stocks mentioned.

More on Investing

calculate and analyze stock
Bank Stocks

Is National Bank of Canada Stock a Buy for its 3.3% Dividend Yield?

While National Bank stock might seem to have a lower dividend yield, its upside could offer a valuable way to…

Read more »

An investor uses a tablet
Investing

4 Value Stocks That Are Must Buys for Canadians in November

Whether you want to add growth or defence to your portfolio, these four stocks are some of the best Canadian…

Read more »

Oil industry worker works in oilfield
Energy Stocks

Is Suncor Stock a Buy, Sell, or Hold for 2025?

Suncor stock looks undervalued as the company continues to increases cash flows, earnings, and shareholder returns.

Read more »

monthly desk calendar
Dividend Stocks

This 7.8% Dividend Stock Pays Out Every Month

Not all monthly dividend stocks are created equal. And this top stock is certainly a strong choice for passive income.

Read more »

Canada national flag waving in wind on clear day
Investing

Top Canadian Small-Cap Stocks to Buy Now

These top Canadian small-cap stocks offer higher growth potential and could deliver stellar returns over time.

Read more »

A worker gives a business presentation.
Dividend Stocks

Is TMX Group Stock a Buy, Sell, or Hold for 2025?

TMX Group (TSX:X) stock has been a consistent wealth-builder, generating 4,630% in total returns since 2002. Should you buy, sell,…

Read more »

calculate and analyze stock
Tech Stocks

1 Stock That’s Just as Hot as Nvidia (Without All the Hype)

Nvidia stock may look like a strong option, but its valuation is through the roof. Enter this other under-the-radar stock.

Read more »

Man data analyze
Dividend Stocks

2 Deeply Undervalued Dividend Stocks to Buy in November

Here are two stocks that I view as deeply undervalued this November.

Read more »