Here at The Motley Fool, we believe that investors can earn returns above that of the market averages through the diligent selection of superior individual stocks. But for investors who do not have the time or inclination to do so, exchange-traded funds (ETFs) can help capture returns nearly identical to that of the broad stock market indices they track.
With indexes such as the S&P 500 historically returning about 10% per year, the long-term ownership of these ETFs can help investors amass substantial retirement wealth. With this in mind, read on to learn about two of the best ETFs available in the market today.
A strong core
If there was one ETF that could form the foundation of most investors' retirement portfolios, it would likely be the Vanguard S&P 500 ETF (NYSEMKT:VOO). This exchange-traded fund tracks the S&P 500 Index (SNPINDEX:^GSPC), thereby giving investors low-cost, diversified access to 500 of the largest publicly traded businesses in America. In turn, it offers investors a means to profit from the overall growth of the U.S economy.
Vanguard's fees for VOO are extremely reasonable at 0.05%. That's only about $5 per $10,000 invested per year.
These low fees are part of the reason why legendary investor Warren Buffett advocates investing in an S&P 500 index fund. In fact, in his 2013 letter to shareholders, Buffett explained how he wants the wealth he'll leave behind to his wife to be invested:
My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors -- whether pension funds, institutions or individuals -- who employ high-fee managers.
To Buffett's point, the S&P 500 has outperformed about 80% of actively managed large-cap funds over the last decade. So investors are not sacrificing performance in exchange for low fees. Rather, it's just the opposite: the Vanguard S&P 500 ETF's minuscule fees are why it's able to offer returns nearly identical to that of the S&P 500 Index, which, based on historical results, are likely to continue to exceed the returns delivered by most active fund managers.
Smaller companies, bigger returns
For those willing to take on more risk in exchange for the potential for even greater rewards, small- and mid-cap stocks can deliver higher returns than their larger brethren. And one excellent way to gain exposure to these stocks is through the Schwab US Small-Cap ETF (NYSEMKT:SCHA).
This exchange-traded fund tracks the Dow Jones U.S. Small-Cap Total Stock Market Index, which comprises the smallest 1,750 of the largest 2,500 publicly traded companies in the United States. And like VOO, fees are low, at only 0.06%.
The Schwab US Small-Cap ETF has 60% of its assets invested in small-cap stocks and about 20% each in mid-cap and micro-cap companies, according to Morningstar. This ETF therefore pairs nicely with a large-cap S&P 500 Index fund like VOO, and gives investors access to areas of the U.S stock market they otherwise would miss out on if they only owned large-cap stocks. Even better, a portfolio that contains both large and small companies should have a greater overall expected return profile, while still maintaining a lid on volatility.