Building a portfolio by selecting individual stocks can be financially rewarding, but finding companies that are worth buying and holding for the long term can be time-consuming and involve more risk than some investors are comfortable with. Index funds, on the other hand, present a simpler way to gain exposure to a wide range of equities and are a good option for investors who are looking to match market benchmarks or reduce their broader portfolio's overall risk profile.
Here's why Vanguard Dividend Appreciation ETF (NYSEMKT:VIG), iShares Dow Jones U.S. Healthcare ETF (NYSEMKT:IYH) and the Vanguard Information Technology ETF (NYSEMKT:VGT) are index funds to buy this month.
Get dividends now and in the future
Dan Caplinger (Vanguard Dividend Appreciation ETF): Dividend investors know how important it is for companies to show their ability to return capital to shareholders, but the best investors look beyond what a company is paying now. Instead, they focus on what prospective dividend stock investments will be able to pay in the future, hoping to find companies that will produce extensive growth in their payouts over time. The Vanguard Dividend Appreciation ETF has turned dividend growth into an index-driven investment philosophy, and the fund has been able to produce extremely solid returns over the years while also giving investors plenty of income along the way.
Vanguard Dividend Appreciation owns nearly 200 stocks selected based on their track records of delivering rising dividends over time. That doesn't necessarily equate to the top-yielding dividend stocks right now, as you can see from the fact that Vanguard Dividend Appreciation has a current yield of only about 2.1%. But it instead emphasizes the fact that many income investors need not only reliable dividends now but also future dividend payments that can keep up with inflation, and the stocks that Vanguard Dividend Appreciation chooses are more likely to be able to deliver what these investors need.
Vanguard Dividend Appreciation isn't the only ETF with this type of mandate, but its 0.09% expense ratio and 10-year average annual return of nearly 8% show its success in doing so. Dividend investors looking for rising dividends can look to Vanguard Dividend Appreciation as a vehicle that will give them what they want.
Two megatrends are driving this industry
Jason Hall (iShares Dow Jones US Healthcare ETF): There's plenty of rhetoric coming out of Washington, D.C., with regards to reducing healthcare spending and driving down prices for prescription drugs. And this may cause some investors to turn bearish on healthcare companies in the near term.
But the fact is, healthcare spending in the U.S. -- and around the world, for that matter -- is far more likely to grow for many years to come. Two very big trends are driving this.
The first is happening here at home in North America, with an average of 10,000 baby boomers reaching retirement age every day between now and 2030. And the average baby boomer is living longer than past generations. This makes a long-term investment in the iShares U.S. Healthcare ETF worthwhile. But it might not even be the best reason.
As much as healthcare spending in the U.S. is set to grow, global health spending could be a much, much bigger opportunity. Over the same period that millions of Americans will reach retirement age, the global middle class is set to expand by more than 1 billion members. That's a massive new market of consumers who will have the means to pay for better healthcare.
Despite the "US Healthcare" part of its name, the companies in this ETF are by and large positioned to benefit greatly from a larger global middle class. As of this writing, almost 80% of its value is in pharmaceutical, medical equipment, and biotechnology companies, which are actively pursuing international growth.
If you're looking to invest in a long-term trend set to drive decades of growth, the iShares US Healthcare ETF should be at the top of your investing short list. It's a little on the pricey side for an index fund, with its expense ratio of 0.44%, but the healthcare industry is as well-positioned for decades of growth as any, and this fund makes for an ideal way to invest in that prospect.
Keith Noonan (Vangaurd Information Technology ETF): The tech sector remains one of the best places to find growth, and the Vanguard Information Technology ETF stands out as a top choice for investors seeking diversified technology exposure. Evidencing the sector's momentum, VGT has gained roughly 160% over the last decade while the S&P 500 Index has increased roughly 70%.
With technology poised to play a growing role in business and everyday life, it's not unreasonable to expect that tech stocks will continue to outperform the broader market for many years to come. Of course, greater growth potential also comes with added risk, so investors with a more conservative approach might be better served by index-tracking funds that cover a wider range of sectors, but the Vanguard Information Technology ETF is a standout choice for those on the hunt for a dedicated tech sector ETF.
The fund offers great liquidity and a comparatively low expense ratio at just 0.1%, which Vanguard states is 93% lower than the average expense of funds with similar holdings. VGT is made up of 365 stocks and covers industries including software and IT services, semiconductors, professional and communications services, and networking, so the fund delivers a good amount of diversity within the sector.
It also pays a dividend, and while the fund's 1.3% yield might not look like much, the returned income component is a notable positive on top of the ETF's potential for growth.
Dan Caplinger has no position in any stocks mentioned. Jason Hall has no position in any stocks mentioned. Keith Noonan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.