The end of the year is a prime opportunity to review your finances, and now is the time to think about adding investments to your portfolio.
Stock prices are down significantly over the past year, which means it's your chance to load up on quality investments for a fraction of the price. Exchange-traded funds (ETFs) can be a smart option for many investors, but choosing the right funds is key.
While the right investment for you will depend on your personal preferences, there are three types of ETFs that could be smart buys in 2023.
1. S&P 500 ETF
An S&P 500 ETF is a fund that tracks the S&P 500 index itself. It aims to mirror the performance of the index, and it includes roughly 500 stocks from some of the largest companies in the U.S.
S&P 500 ETFs can be a fantastic option if you want a more stable investment that is less susceptible to volatility.
The companies within the S&P 500 are some of the largest in the world, including household names like Amazon, Apple, and Microsoft. While these stocks may take a hit in the short term during market downturns, there's a strong chance they'll recover.
The S&P 500 itself also has a long history of recovering from downturns. In fact, since 1928, the S&P 500 has experienced 21 bear markets (not including the current slump) -- and it's recovered from every single one of them.
2. Total stock market ETF
A total stock market ETF (or a broad market ETF, as they're sometimes called) is similar to an S&P 500 ETF, except it's more expansive. An S&P 500 ETF only includes stocks from large companies, whereas a total stock market ETF includes stocks from large, mid-size, and smaller corporations.
This type of ETF can be beneficial for a couple of reasons. For one, it provides more diversification. For instance, the Vanguard S&P 500 ETF includes 503 stocks, while the Vanguard Total Stock Market ETF contains 4,028 stocks. Although it is possible to over-diversify, a wider variety of stocks in your portfolio can help lower your risk.
Also, small-cap and mid-cap stocks can sometimes see higher returns than large-cap stocks, as smaller corporations often have more room to grow. Because total stock market ETFs include small, midsize, and large companies, they can help you take advantage of that growth without losing the stability of large-cap stocks.
3. Growth ETF
A growth ETF contains stocks with the potential for faster-than-average growth. These types of ETFs are designed to beat the market, but they can also experience more severe short-term downturns.
For example, the Invesco QQQ ETF (QQQ +1.06%) is a growth ETF focused primarily on tech stocks. It includes around 100 domestic and international stocks, and roughly half of the fund comprises stocks from the information technology sector.
So far this year, QQQ is down nearly 30%, while the S&P 500 is only down around 16%. But over the past five years, QQQ is up more than 78%, compared to the S&P 500's roughly 50% gains.
NASDAQ: QQQ
Key Data Points
In other words, growth ETFs tend to be hit hard during periods of market volatility. But if you hold your investments through the rough patches, you could see significantly higher-than-average gains over the long run.
Choosing the right investments is key to building wealth in the stock market. Despite the current market slump, now is a fantastic time to load up on high-quality ETFs that you'll thank yourself for buying, in 2023 and beyond.
