A recent survey by Discover Student Loans found that 68% of parents of college-bound students are concerned about paying their children's education. Given the economic uncertainty caused by the coronavirus pandemic, paying for college may be an even bigger worry than usual for many families.
Whether college payments are way down the road, right around the corner, or already upon you, exchange-traded funds (ETFs) are investments that can help you meet your college financing needs. ETFs provide a way for investors to buy multiple stocks or bonds at once. Investors buy shares of ETFs, and that money is used by the fund manager to invest according to a certain objective (like mirroring a broader market index or investing only in stocks from a certain sector like tech or automotive).
Here are three good ETF options that can help you save up for college expenses (depending on your time horizon).
1. Invesco QQQ Trust
If your kids are young, more than 10 years away from college, you should take advantage of time and invest in a more aggressive growth ETF. Growth investments have outperformed value and broader market investments over the long term, despite the risk of short-term market fluctuations.
A great option here is the Invesco QQQ Trust ETF (NASDAQ:QQQ). The Invesco QQQ tracks the Nasdaq 100, so it invests in the 100 largest technology companies in the world, like Apple (11.8%), Microsoft (11.3%), Amazon (11%), Facebook (4.1%), and Alphabet (3.8%). Given the current strength of the technology sector, the Invesco QQQ is one of the best-performing ETFs out there, both in the short term and long term. The ETF is up 27.7% year to date and has returned 48.2% over the past 12 months. Over the past 10 years, it has an annualized return of 20.4%.
If you invested $10,000 in this ETF on June 30, 2010, you would have had $64,000 as of June 30, 2020. That could certainly help offset those college bills. This ETF also has a low expense ratio of 0.2%, which is lower than the average growth ETF.
2. Vanguard Total Stock Market ETF
Continuing growth in the technology sector over the next 10 years is a pretty safe bet, given how the world is rapidly going digital, accelerated by social distancing protocols. New transformative technologies like artificial intelligence are also developing at a rapid pace. But it's smart not to put all your eggs into one ETF basket of technology stocks, so a broad ETF that invests in the total market is a good way to diversify.
Total market funds give you exposure to companies of all sizes from every sector of the economy. These are typically the cheapest ETFs to invest in with minuscule expense ratios, and because they are so diversified, they have much lower volatility than most ETFs with steady returns.
The best of the bunch is the Vanguard Total Stock Market ETF (NYSEMKT:VTI). This ETF tracks the CRSP U.S. Total Market Index and invests in a basket of over 3,500 stocks, including small-, mid-, and large-cap companies across both growth and value investment styles. With a median market cap of $96 billion, it is considered a large-cap blend fund with 26% of the portfolio in technology, 16% in financials, 14% in consumer services, and 14% in healthcare.
Year-to-date the ETF is up about 2.9%, and over the past 12 months it is up about 14.5%. Over the past 10 years, the ETF has posted an annualized return of 13.6%, which beats the S&P 500. Plus, it has an annual expense ratio of 0.03%, which is among the lowest on the market. So for every $10,000 you invest, the expense is just $3 per year.
3. SPDR Portfolio S&P 500 Growth ETF
In addition to a technology-focused ETF and a total market ETF, investors should find value in one of the best ETFs for large-cap growth companies. The SPDR Portfolio S&P 500 Growth ETF (NYSEMKT:SPYG) tracks the S&P 500 Growth Index, providing exposure to S&P 500 companies that display the best growth characteristics based on sales growth, price-to-earnings ratio, and momentum, among other factors. The three largest holdings are Microsoft (9.7%), Apple (9.6%), and Amazon (7.9%), along with Alphabet, Visa, Mastercard, NVIDIA, and Netflix.
The ETF, which was launched in 2000, is up 16.9% year-to-date and 28.6% over the past 12 months. Over the last 10 years, it has returned about 16.7% on an annualized basis. While the returns are strong, what sets this ETF apart from other competing large-cap growth ETFs is its rock-bottom expense ratio of 0.04%. The average in this category is 0.39%.
Over the last 10 years, these ETFs have all beaten the S&P 500 and done so with lower expense ratios than most of their competitors. A portfolio of one, all, or any of these ETFs -- invested for the long-term -- would certainly prepare you for those college bills.