There are a lot of exchange-traded funds (ETFs) you can choose from. Vanguard is a good place to start your journey if you are looking for low-cost ETFs backed by a well-respected company. Four of the best options from this asset manager are Vanguard Total Bond Market ETF (BND 0.23%), Vanguard Total Stock Market ETF (VTI 0.93%), Vanguard Dividend Appreciation ETF (VIG 0.10%), and Vanguard High Dividend ETF (VYM -0.20%). Here's why you should consider owning them.
Focus on what you control
This may sound like a ridiculous statement, but if you don't save money you'll never have money to invest. Putting as much effort as possible toward living below your means and putting cash aside for long-term investing (hopefully after you have created an emergency fund with three to six months of living expenses in it) will be the single most important thing you can do to ensure you create a million-dollar portfolio. That is why Vanguard Total Bond Market and Vanguard Total Stock Market could be the best options for most investors.
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As their names imply, you will essentially own the entire stock market and the entire bond market with just two ETFs. That is the foundation of a simple balanced fund portfolio. All you need to do is decide how much you want to allocate to stocks and how much to bonds. For most investors, 60% stocks and 40% bonds would traditionally be considered a good target. Inch up the stock component if you are more aggressive, or if you are conservative, increase the bond component slightly.
Rebalance once a year or so, and the rest of your time and emotional energy can be spent on ensuring you live up to your savings goals. Don't underestimate how hard saving money can be, since life and emotions have a habit of getting in the way. You won't outperform with these two ETFs, but you will benefit from economic growth over time, which is the bigger goal of investing anyway. Both funds have 0.03% expense ratios, so they are ultra-cheap to own.
Focusing on dividend stocks
That said, some investors will prefer to focus their equity investments in some way. A good option is to use dividend stocks, since dividends provide income and are also a signaling mechanism for management. A company has to have a strong business to pay a dividend, or at least most do. So using dividends can help to weed out weaker companies that you might not want to own anyway. Both Vanguard Dividend Appreciation and Vanguard High Dividend only invest in dividend-paying stocks.
But the two ETFs diverge materially in what they focus on, as their names imply. Vanguard High Dividend takes dividend-paying stocks and then invests in them based on their yields, with more money going to higher-yielding companies. Essentially, this gives the ETF a value bias, and it increases the income the ETF generates. The yield is around 3.1%. If you like income, this is a solid and easy-to-own ETF.
Vanguard Dividend Appreciation looks only at stocks that have increased their dividends for 10 or more years, and then eliminates the highest-yielding 25% of the stocks from consideration. The remaining stocks are then market-cap weighted. This ETF has a growth bias. Despite the focus on dividends, the yield is around 1.9%, since dividends are really used as a screening tool and not with the intent of maximizing income.
As the chart above shows, Vanguard Dividend Appreciation has achieved better returns over time, even from a total return perspective, which assumes dividend reinvestment. That's exactly what you would expect. The real question is whether you want to generate income to pay for living expenses or if income is just a secondary consideration. Both of these ETFs are inexpensive to own, with expense ratios of 0.06%. If you wanted to be a bit more focused, you could easily swap out Vanguard Total Stock Market ETF from the pairing above with either of these two dividend ETFs.
Keep things simple
Investing is not easy, and for many investors, the best option is to simplify as much as possible. That's exactly what Vanguard Total Bond Market ETF, Vanguard Total Stock Market ETF, Vanguard Dividend Appreciation ETF, and Vanguard High Dividend ETF allow. That frees you up to focus on saving money, which is probably the place where you'll have the biggest impact on your long-term wealth anyway. Mix and match from this list to create a balanced portfolio and stick with it through thick and thin. Given enough time, you stand a good chance of ending up with a million-dollar portfolio.
