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3 Top Funds to Keep You in the Investing Game

By Jason Hall, Rich Duprey, and George Budwell – Mar 2, 2018 at 6:31PM

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Individual stocks are great, but ETFs and mutual funds can help you get the best returns and manage your risk of losses.

We love writing about stocks here at The Motley Fool. But individual equities aren't the only way to invest. And quite frankly, they aren't always the best way for many people. Furthermore, owning a mix of individual stocks, ETFs, and mutual funds can be a very effective way to balance your risks and maximize your long-term results.

We asked three Motley Fool investors for insight on ETFs and mutual funds. They came up with three that provide excellent how-to examples:

  • Target a specific industry, like healthcare, with the Vanguard Health Care Fund Investor Shares (VGHCX 0.87%).
  • Easily take advantage of the stock market's long-term results, with the Vanguard S&P 500 ETF (VOO 0.17%).
  • Keep short-term money invested, but with lower risk of quick losses, with the Vanguard Long-Term Bond ETF (BLV -1.75%).
A woman looks over her shoulder at a chalkboard with dollar signs drawn on it.

Image source: Getty Images.

Looking for simpler, easier ways to keep invested? Let's learn how the right mutual funds and ETFs can help you accomplish your investing goals.

An easy way to invest in healthcare

George Budwell (Vanguard Health Care Fund): The healthcare sector has been surging higher for the better part of this decade due to favorable tailwinds. These include an aging global population, broader access to health insurance, and stunningly fast rates of innovation for both medical devices and pharmaceuticals.

Picking individual healthcare stocks, however, can be exceedingly dangerous to your portfolio. Companies with limited product portfolios or clinical pipelines, after all, can lose the bulk of their value in the blink of an eye.

Fortunately, the Vanguard Health Care Fund offers an easy and profitable way around this particular risk factor. The Vanguard Health Care Fund is an actively managed fund with a rock-bottom expense ratio of 0.37%. (The average expense ratio among similar healthcare funds presently stands at 1.31%.)

The best part, though, is that fund is composed exclusively of mid- to large-cap healthcare stocks like Bristol-Myers Squibb, Allergan, and Vertex Pharmaceuticals, all companies with well-rounded product portfolios. In other words, this highly diversified healthcare fund takes a fairly low-risk approach to capital appreciation.

VGHCX Total Return Price Chart

VGHCX Total Return Price data by YCharts.

Even so, the fund's rather conservative approach to asset allocation has still generated exceptional returns for investors since its inception in 1984. The fund's average five-year return on capital, for example, presently sits at an impressive 17.68%. Similar funds, by contrast, have been averaging a far less impressive 7.36% return on capital over the last five years.

So, if you're looking for a quick way to buy a basket of top healthcare stocks without paying exorbitant fees, the Vanguard Health Care Fund is definitely worth checking out.

Plain vanilla still the best

Rich Duprey (Vanguard S&P 500 ETF): The phrase "keep it simple, stupid" has been applied to all manner of topics, but arguably it is best applied to investing, where making money can seem overly complex and intimidating. Sticking to the basics can dramatically lower the stress and fear of diving into the market, and that's where the Vanguard S&P 500 ETF comes in.

John Bogle, the founder of the Vanguard Group and the godfather of index investing, created the ultimate simple investment vehicle in his S&P 500 index fund, which is available in ETF form. Among its many benefits, the Vanguard fund charges a super-low 0.04% expense ratio while investing in the 500 largest companies in the market that comprise the S&P 500 index.

More than the Dow Jones Industrial Average, the S&P 500 represents a broad cross section of the U.S. economy, so investing in funds based on the index gives you immediate diversification. You might still want to look at small-cap companies such as those in the Russell 2000 index, and international markets with indexes focusing on Europe, Australasia, or the Far East. But beginning with an S&P 500 fund -- and Vanguard's ETF is among the best available -- will put you well on your way to simplicity, not to mention superior returns compared to actively jumping in and out of individual equities.

A great investment for the short term

Jason Hall (Vanguard Long-Term Bond ETF): Bonds have become an afterthought for many investors, since interest rates have been at historically low levels for years. But depending on your age and time frame, this thinking could lead you down a path to unexpected losses right before you'll be counting on that money. Look no farther than the recent market sell-off for evidence of how fast things can turn ugly:

^SPX Chart

^SPX data by YCharts.

The Dow Jones Industrial Average and the S&P 500 both fell more than 10% in nine trading days -- and that was just a run-of-the-mill "correction." Back during the financial crisis, the market lost 40% of its value in just five months:

^SPX Chart

^SPX data by YCharts.

The good news is that while the market can fall quickly, it tends to bounce back stronger over the long term. So plan to hold your stock investments through the downturns.

But if you're investing money you'll have to start spending soon (within the next five years or so), the Vanguard Long-Term Bond ETF may be what you need. Made up of investment-grade U.S. government and corporate bonds, this bond fund offers both predictable returns and much lower volatility than stocks. It yields around 3.8% at recent prices, so it also provides far more income than savings or CDs.

This isn't a zero-volatility investment; its value will fluctuate with interest rates. But your risk of big -- and fast -- losses is far lower than with stocks.

George Budwell has no position in any of the stocks mentioned. Jason Hall has no position in any of the stocks mentioned. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool recommends Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.

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