If you are just starting out looking to invest and have a limited amount of money, you may be wondering where the best place is to start. Instead of investing in individual stocks, I'd suggest beginning with an exchange-traded fund (ETF). ETFs are a portfolio of investments, so they give you instant diversity as opposed to investing in a single company.
For beginner investors and seasoned ones too, I like ETFs from investment company Vanguard. It is the king of index funds and has long been known for its low fees. Since ETFs include a portfolio of companies, they have expense ratios attached to them that the investment company charges for its services. These fees are deducted daily and reflected in the performance of the ETFs.
Even a seemingly low expense ratio of 1% can have a major impact on returns over time. In a study by the Securities Exchange Commission (SEC) study, a $100,000 investment with a 4% annual return that is reduced by a 1% expense ratio returns around $30,000 less than an investment with a 0.25% expense ratio over a 20-year period.
While 1% of $1,000 is only $10, as you invest more into the ETF and the value grows, it can start to add up quickly. Fortunately, Vanguard has some of the lowest fees around, especially for its index ETFs.
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The Vanguard Growth ETF
One of my favorite ETFs is the Vanguard Growth ETF (VUG +0.17%). The ETF has an expense ratio of just 0.04% compared to an average expense ratio of other similar growth funds of 0.94%, according to Vanguard based on Morningstar data. This means that investors get to keep nearly all the returns of the underlying index.
One of the big reasons I like the Vanguard Growth ETF is that it is focused on large-cap growth stocks, especially those in the technology sector. The ETF tracks the performance of the CRSP US Large Cap Growth Index, which is essentially the growth-oriented half of the S&P 500. Nearly 60% of the ETF's holdings are stocks in the technology sector, while another nearly 20% are classified as consumer discretionary. However, some tech-oriented companies get pushed into the consumer discretionary category, such as Amazon, which is the largest cloud-computing company in the world and designs its own semiconductors, and Tesla, which is pushing into autonomous driving and robots.
Overall, the Vanguard Growth ETF gives investors a heavy concentration of some of the leading technology companies in the world. Its top 10 holdings as of the end of 2024 were the following:
| Company | Weighting | Company | Weighting | |
|---|---|---|---|---|
| Apple | 13.4% | Meta Platforms | 4.5% | |
| Microsoft | 11.1% | Tesla | 3.9% | |
| Nvidia | 11% | Eli Lilly | 2.3% | |
| Amazon | 7.3% | Broadcom | 1.9% | |
| Alphabet | 5.5% | Visa | 1.9% |
Source: Vanguard
The Vanguard Growth ETF has also been a very strong performer over the years, nicely outperforming the S&P 500 over the long term. The ETF has an average annual return of 16.2% over the past decade as of the end of January, compared to 13.8% for the S&P 500. On a cumulative basis, the ETF is up 346.9% compared to 263% for the S&P 500. For a $1,000 investment, that means you would reach $4,469 at the end of 10 years.
The returns have been even stronger recently. The ETF has generated an average annual return of 18.1% over the past five years and 32.3% over the past year as of the end of January. That compares to an average annual return of 15.2% for the S&P 500 over the past five years and 26.4% over the past year.
Here is a closer look at how the Vanguard Growth ETF's performance stacks up against the returns of the S&P 500 as of the end of January.
| Average Annual Return | 1-year | 3-year | 5-year | 10-year |
|---|---|---|---|---|
| Vanguard Growth ETF | 32.3% | 13.6% | 18.1% | 16.2% |
| S&P 500 | 26.4% | 11.9% | 15.2% | 13.8% |
Source: Vanguard
Dollar-cost averaging
Investing $1,000 and just leaving it there for the next 10 or 20 years will likely increase your investment, but it will not make you wealthy, and ultimately, that is the goal. As such, the key is to invest in the ETF on a consistent basis. Setting aside money to invest each month or with each paycheck is one of the best ways to accumulate long-term wealth.
This strategy is called dollar-cost averaging, in which investors will buy an investment, such as an ETF, on a regular basis, whether the investment is up or down in price. Over the long term, this is a strong proven strategy that helps investors achieve great wealth.
For example, if you invested $1,000 and added $500 a month into an ETF that generates a 10% average annual return, it would be worth over $1 million in 30 years. Bump that additional investment to $1,000 per month, and it would be worth over $1 million in 23 years. Note that actual results could differ due to market fluctuations, but this gives you a good sense of the type of returns you could see.
