This article was updated on January 8, 2018, and originally published on March 24, 2017.
At The Motley Fool, we obviously love researching and investing in stocks. However, not every investor has the time, desire, or capital required to create a well-diversified portfolio of individual stocks -- especially new investors. Fortunately, through the magic of exchange-traded funds, or ETFs, new investors can invest in stocks without having to invest thousands of dollars or spend hours researching and planning investments. Here are three in particular that new investors can use to form an excellent "base" to their portfolio.
Warren Buffett's favorite ETF
Although he's known as one of the best stock-pickers of all time, billionaire investor Warren Buffett has said several times that the best investment most people can make is a simple low-cost S&P 500 ETF. In fact, he's nine years into a 10-year bet that such a fund of his choosing could beat a set of at least five hedge funds. Buffett's pick for the bet? The Vanguard S&P 500 index fund, which is available in both ETF and mutual fund forms.
As the name implies, this ETF tracks the S&P 500 index, which is composed of 500 of the largest publicly traded American companies. And don't think by simply investing in an index fund like this that you'll be sacrificing performance -- over long periods of time, the S&P 500 has averaged annual returns of 9-10% (including dividends), and has outperformed 80% of actively managed large-cap mutual funds over the past 10 years.
The Vanguard S&P 500 ETF (NYSEMKT:VOO) is an excellent option for new investors, as it's a diverse basket of the largest U.S. companies, and comes with an extremely low expense ratio (annual management fee) of just 0.04%. In other words, if your initial investment in the fund is for $1,000, this translates to an annual management fee of just $0.40.
A little more risk, a little more reward potential
The iShares Core S&P U.S. Growth ETF (NASDAQ:IUSG) invests in companies with above-average growth potential. Specifically, the fund tracks the S&P 900 Growth Index, which is composed of large- and mid-cap U.S. companies that exhibit growth characteristics.
Growth stocks are generally defined as companies whose earnings are expected to grow at an above-average rate relative to the average company within the same industry.
Growth stocks tend to be a bit more volatile than value stocks, which are generally more stable and mature businesses. To give you an idea of the type of companies that qualify as "growth" stocks, the fund's top five holdings are Apple, Microsoft, Amazon, Facebook, and Alphabet (Google). Not surprisingly, there are a lot of tech stocks in the index, due to the growing nature of the industry. Because of this inherent volatility risk, growth stocks are an especially good candidate for ETF investors, new and experienced.
So, over the short term, these stocks can move up and down quite a bit (check out a 5-year chart of Facebook), but they certainly have higher growth potential over the long run. This makes this ETF an especially good choice for new investors who are relatively young and have a long time horizon to ride out the ups and downs. And with an expense ratio of just 0.05%, it's tough to find a cheaper growth stock ETF option.
High-dividend stocks can help protect you in a downturn
Dividend stocks tend to hold up better than their non-dividend counterparts during recessions, and also tend to deliver better long-term returns. One great ETF that not only invests exclusively in dividend stocks, but specifically focuses on stocks with above-average dividends, is the Vanguard High Dividend Yield ETF (NYSEMKT:VYM). (NOTE: If you couldn't tell by my suggestions, I'm a big fan of Vanguard ETFs, thanks to their extremely low fees.)
The High Dividend Yield ETF tracks the FTSE High Dividend Yield Index, which is a collection of stocks (394 to be exact) that pay above-average dividend yields, specifically excluding real estate investment trusts (REITs). As of January 2018, the fund pays a 3.5% dividend yield.
Among the fund's top investments are rock-solid American companies such as Microsoft, ExxonMobil, Johnson & Johnson, JPMorgan Chase, and Wells Fargo. Like the other Vanguard fund I discussed, this one also has an extremely low expense ratio -- 0.08% in this case.