Buying and holding individual stocks is a great way to build long-term wealth -- but not everyone has the time to research individual companies. Investors looking for a more passive way to stay invested should consider index funds that track certain sectors.
Today, three of our top investors at The Motley Fool will share their insights into three popular index funds and their ETF equivalents: the Vanguard FTSE All-World ex-US ETF (NYSEMKT:VEU), Vanguard Dividend Appreciation ETF (NYSEMKT:VIG), and the Vanguard Industrials ETF (NYSEMKT:VIS).
A simple way to buy overseas stocks
Leo Sun (Vanguard FTSE All-World ex-US): Investors should always own some overseas stocks, since they can pick up the slack if the U.S. market stumbles. However, international stocks can be challenging to pick, since the brands may be unfamiliar and some stocks don't trade on U.S. exchanges.
An elegant solution to that problem is the Vanguard FTSE All-World ex-US Index Fund, which can also be bought as an ETF. The fund includes about 2,220 holdings in nearly 50 developed and emerging countries -- excluding the United States.
European stocks account for 43% of the fund's holdings, and the U.K. and France are the top regions. Thirty percent comes from the Pacific region, led by Japan; 21% comes from various emerging markets, led by China; and 6% comes from North America, led by Canada. Less than 1% of its holdings come from the Middle East and other markets.
As of this writing, the fund's top five holdings are Chinese tech giant Tencent, oil major Royal Dutch Shell, packaged foods giant Nestle, Korean tech giant Samsung, and British bank HSBC.
The fund hasn't always outperformed the S&P 500, but it's rallied 17% in the past 12 months against the S&P 500's 15% gain. If the U.S. market underperforms its overseas counterparts, that gap could widen in the fund's favor.
Get the income and growth you need
Dan Caplinger (Vanguard Dividend Appreciation): Dividend stocks are a great way to invest in the stock market because they provide two things that every investor likes: the potential for dramatic share price appreciation over time and regular and reliable income payments. That combination has been especially attractive in recent years when there weren't many good options for generating portfolio income outside the stock market.
Some dividend investors simply pick the highest-yielding stocks, but Vanguard Dividend Appreciation has a different philosophy. The ETF doesn't hesitate to pass up some of the best yields in the dividend stock universe, instead favoring some lower-yielding companies that nevertheless have put together a track record of consistently growing their payouts over time. By concentrating on dividend growth rather than yield, the Vanguard ETF keeps its focus on the future, looking to maximize total long-term income rather than immediate dividend payments. That also gives the ETF's portfolio more exposure to stable, robust companies that can generate strong results in good times and bad.
If you want to stay invested, there's no substitute for good dividend stocks with a demonstrated ability to keep paying and growing their dividends year in and year out. That's what you'll get with Vanguard Dividend Appreciation, and the long-term returns that its holdings have produced speak for themselves.
How to play the industrials opportunity
Neha Chamaria (Vanguard Industrials ETF): Let's face it: Industrial stocks, in general, have zoomed up in recent quarters, and several look pricey at the moment. Nonetheless, the industrial growth story continues to gather steam, backed partly by stronger commodity prices and increased global spending in key industries such as construction. However, you still might be wary about investing in individual stocks, but want to play the upturn, which is why the Vanguard Industrials ETF can be a great choice.
Vanguard Industrials ETF tracks the MSCI US Investable Market Industrials 25/50 Index, which is an index of more than 300 stocks belonging to different industrial subsectors. A closer look at the ETF's portfolio as of January 31, 2018 reveals 23.7% exposure to aerospace and defense, 13.9% to industrial conglomerates, and 10.8% to industrial machinery. Overall, the ETF is invested in 23 industrial subsectors.
This diversification within the industrials space is the key to the ETF's returns. For example, consider that General Electric is among the top five stocks in the ETF's portfolio -- in fact, was its largest holding at the beginning of 2017. You probably know what a disaster GE stock has been since then. Yet, Vanguard Industrials ETF has returned solid double-digit growth over the period excluding dividend reinvestment (in which case, its returns bump up by a little over 2 percentage points).
With solid names like Boeing, 3M, and Honeywell International in its top five holdings, Vanguard Industrials ETF could be a great choice for long-term investors. An incredibly low expense ratio of 0.10% should further add to its appeal.
Dan Caplinger owns shares of Vanguard Dividend Appreciation ETF. Leo Sun owns shares of Tencent Holdings. Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nestle and Tencent Holdings. The Motley Fool is short shares of General Electric. The Motley Fool has a disclosure policy.