Whether you're new to the stock market or simply want a low-maintenance investment that can help you build wealth with next-to-no effort, exchange-traded funds (ETFs) can be a fantastic option. Each ETF contains dozens or hundreds of stocks bundled together into a single investment, which can help you create an instantly diversified portfolio while barely lifting a finger. With the right ETF, you could potentially earn hundreds of thousands of dollars or more over time.
There are countless ETFs to choose from, and the right investment for you will depend on your risk tolerance and investing goals. But I own three Vanguard ETFs and plan to continue buying them for as long as possible.
1. Vanguard S&P 500 ETF
The Vanguard S&P 500 ETF (VOO 1.00%) tracks the S&P 500 index. It includes stocks from 500 of the largest and strongest companies in the U.S. across a wide variety of industries ranging from tech giants, like Microsoft and Amazon, to century-old brands, like Procter & Gamble and Coca-Cola.
The S&P 500 has a decades-long history of recovering from even the worst crashes, bear markets, and recessions, which makes the S&P 500 ETF a generally safe investment. Research shows that it's harder to lose money with the S&P 500 than it is to make money.
Analysts at Crestmont Research studied the S&P 500's long-term performance and found that every single 20-year period in the index's history ended in positive total returns. This means that if you'd invested in an S&P 500-tracking fund at any point and held it for 20 years, you'd have made money -- no matter how volatile the market was during that time.
Over the past 10 years, the Vanguard S&P 500 ETF has earned an average rate of return of 12.66% annually. It also has a rock-bottom expense ratio of 0.03% per year, so you'll pay $3 per year in fees for every $10,000 in your account. This is far lower than many other ETFs and can save you thousands of dollars in fees.
2. Vanguard Total Stock Market ETF
The Vanguard Total Stock Market ETF (VTI 0.93%) is similar to the S&P 500 ETF, except it's much broader. Rather than tracking just the S&P 500, it aims to replicate the performance of the stock market, as a whole.
This ETF contains 3,731 stocks from roughly a dozen industries. Also, unlike the S&P 500 ETF, which only contains large-cap stocks, this fund includes large-, mid-, small-, and micro-cap stocks. This can provide maximum diversification, further reducing your risk.
The downside to this investment is that it may earn lower returns than some other ETFs. Over the past 10 years, the Total Stock Market ETF has earned an average rate of return of 11.98% per year.
Even this figure could be slightly high, though, considering the market has historically earned an average rate of return of around 10% per year. Going forward, it may be more realistic to expect average returns closer to 10% annually.
For some investors, however, slightly lower returns are a worthwhile trade-off for reduced risk. Again, the Total Stock Market ETF is about as diversified as you can get. If you're looking for an investment that will provide exposure to as many different areas of the stock market as possible, this ETF is a smart choice.
3. Vanguard Growth ETF
The Vanguard Growth ETF (VUG 1.82%) is a fund filled with stocks that have the potential for above-average growth. Of the three ETFs on this list, it's the least diversified with only 208 stocks. Also, nearly 56% of the fund is allocated to stocks in the tech industry, which further limits diversification.
That said, this ETF is designed to beat the market over time -- a feat it's managed to achieve so far. In the past 10 years, the Vanguard Growth ETF has earned an average rate of return of 14.74% per year. While that may not seem like a major difference compared to the other two ETFs on the list, it can add up over time.
If you were to invest, say, $200 per month, here's approximately how much you could accumulate over time, depending on whether you're earning a 10%, 12%, or 14% average annual rate of return:
| Number of Years | Total Portfolio Value: 10% Average Annual Return | Total Portfolio Value: 12% Average Annual Return | Total Portfolio Value: 14% Average. Annual Return |
|---|---|---|---|
| 20 | $137,000 | $173,000 | $218,000 |
| 25 | $236,000 | $320,000 | $436,000 |
| 30 | $395,000 | $579,000 | $856,000 |
| 35 | $650,000 | $1,036,000 | $1,665,000 |
Data source: Calculations by author via investor.gov.
Of course, it's impossible to know exactly how any investment will perform over time. Growth ETFs, in particular, can be incredibly volatile in the short term, and there are no guarantees that this investment will continue beating the market over the long haul.
If you're considering investing in a growth ETF, take an honest look at your risk tolerance. If you're willing to take on more risk for the chance to earn higher returns, it could be a good fit for your portfolio. On the other hand, if limiting risk is your main priority, the S&P 500 ETF or Total Stock Market ETF may be a better option.
Investing in ETFs can be a fantastic way to build wealth with minimal effort, but choosing the right investments is key. While everyone's preferences will differ, I'm planning on keeping these three Vanguard funds in my portfolio for as long as possible.
