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Investing in Your 20s: 3 ETFs to Watch

By David Butler – Sep 2, 2020 at 8:00AM

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In today's age, exchange-traded funds are a useful tool for investors looking to get their feet wet in the market.

If you are in your 20s and just starting to populate your investment portfolio, you are likely discovering that you have lots of options. One consideration that can help narrow things down a bit while still being beneficial is to look into exchange-traded funds (ETFs).

These are easily traded specialty funds that track certain groups of stocks based on specific criteria, offering you exposure to diversified holdings while saving you the work of picking out and investing in each individual stock.

While an ETF helps to focus your investment options, it doesn't mean you still don't have choices to make. With that in mind, here are three ETFs that 20-somethings might want to consider finding out more about.

jar of money

Image source: Getty Images.

1. Vanguard S&P 500 ETF: Keeping up with the market

As much as we may like to think we're going to beat the market with every one of our investment picks, that's pretty tough to do. For someone in their 20s, it can be especially true, as young investors likely don't have a lot of experience picking great companies to invest in just yet. To make sure that at least part of your portfolio keeps in tune with the broader market, you might want to consider an ETF that tracks the S&P 500.

The Vanguard S&P 500 ETF (VOO 1.29%) offers a simple approach. This ETF's performance is basically right in line with the S&P 500. Its largest holding is Apple at 6.4% of its assets. And it has an expense ratio of 0.03%, meaning that just about all of its gains go back to the shareholders.

This ETF offers a non-complicated way to get involved in the stock market. If you're younger and still learning about investing, an index following the broader market is a great way to learn. You gain exposure to all the names you can think of, while achieving a broad diversification. And along with the price performance, the Vanguard S&P 500 ETF also pays a quarterly dividend that carries a dividend yield of 1.67%.

2. Schwab U.S. Dividend Equity ETF: Dividends are kings

Any investment portfolio worth its salt has a portion of it allocated to dividend stocks. The lessons preached on the power of compound interest over time are almost exhausting. However, it's one of the most important lessons someone in their 20s can learn.

The Schwab U.S. Dividend Equity ETF (SCHD 0.52%) is a good fund for focusing on dividends from domestic companies. The fund includes plenty of Dividend Aristocrats -- companies that have raised their yearly dividend payout for at least 25 consecutive years -- like 3M, PepsiCo, and Coca-Cola, and it sports a 3.2% dividend yield. The ETF is a good cheap play with a management fee of just 0.06%. 

Companies in the technology sector make up about 13.59% of the fund, which might seem a bit low considering tech's strong performance this year. When you consider value, though, the fund is more well-positioned. Tech leaders like Netflix or Amazon have produced big gains, but they command very big premiums and they don't currently pay a dividend. The Schwab U.S. Dividend Equity ETF instead has 23.95% in financial services, with 17.21% in the consumer defensive sector. 

3. Vanguard Mega Cap 300 Growth Index Fund: Looking for growth

While the previous two ETFs focus on the broader market and dividend yields, the Vanguard Mega Cap 300 Growth Index Fund (MGK 2.02%) is a direct play on large-cap companies that are producing the biggest gains, i.e. tech stocks. Major tech companies like Apple, Microsoft, Amazon, Facebook, and Alphabet are all included in this fund. 

Of course, this ETF doesn't invest solely in tech. The objective is to follow mega-capitalization growth stocks from the CRSP US Mega Cap Growth Index. Tech stocks make up 37.12% of the fund, but 19.11% of the fund is going toward consumer cyclical companies. Another 7.13% is in healthcare stocks and 8.82% is in financial services. Because the fund is growth-oriented, the dividend yield for this ETF ends up being a low 0.68%, with management fees of 0.06%.

The ETF has outpaced the market this year, as larger tech names have drastically outpaced the broader market. While that probably isn't a trend that can last forever, it's hard to see big tech names like Amazon weakening in significance over the coming decade. To that end, this is a good fund for someone in their 20s to maintain exposure to the industry showing the most promise right now.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. David Butler has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, Microsoft, and Netflix. The Motley Fool owns shares of Vanguard S&P 500 ETF. The Motley Fool recommends 3M and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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