Are you a new investor feeling overwhelmed by too many choices? Maybe you're just hoping to simplify your investing. Whatever the case, you're not alone. Owning stocks can be a lot of fun. But it can also be a lot of work -- particularly if you're someone who tends to overthink things, and then feels like your picks require constant monitoring.
Fortunately, there's an easy solution. Exchange-traded funds (ETFs) are a simple, low-maintenance option that won't crimp your portfolio's overall returns. They may even improve your net long-term gains. Best of all, you can employ this simpler option with just a single fund family's exchange-traded funds. That's Vanguard.
To this end, here's a closer look at the three top Vanguard ETFs you might want to buy sooner than later. Committing as little as $2,000 to these picks would still be a meaningful start to your journey, even if you're only trying to own fewer individual stocks.
Here they are, from most important to least important.
Vanguard S&P 500 ETF
If you've been in the market -- or even been thinking about it -- for any length of time at all, then you've almost certainly heard the advice to start with an index fund.
The thing is, this frequently dispensed recommendation really is the smartest first move for most investors. Rather than forcing you to run the risk and take on the stress of picking and monitoring several different companies' stocks, an index fund lets you plug into a diversified sliver of the market with just one trade. In most cases the index in question will be the S&P 500 (^GSPC 0.65%), which is arguably the most watched market barometer in the world.
NYSEMKT: VOO
Key Data Points
The data firmly supports this premise. In its most recent look at the numbers, Standard & Poor's reports that 65% of large-cap mutual funds offered to investors in the U.S. underperformed the S&P 500 last year. And things get worse the further back you look. Stretching the look-back timeframe out to three years, 85% of these funds lagged their large-cap benchmark. For the past 15 years, nearly 90% of large-cap mutual funds trailed the performance of the S&P 500 index.
What gives? The decisions required to beat the broad market rarely pan out as hoped, and often backfire a bit. Less is more, and simpler is better.
Your best bet, therefore, isn't trying to beat the market but merely aiming to match its long-term results. The Vanguard S&P 500 ETF (VOO 0.52%) will allow you to embrace this passive indexing strategy quite nicely.
Vanguard Dividend Appreciation ETF
Given enough time, the Vanguard Dividend Appreciation ETF (VIG 0.63%) probably won't lead or lag the overall performance of the market. It's just going to match it in a different way, and on a different time frame.
NYSEMKT: VIG
Key Data Points
As the name suggests, Vanguard's Dividend Appreciation ETF holds dividend-paying stocks with a strong likelihood of raising their payouts in the near and distant future. It's specifically built to mirror the S&P U.S. Dividend Growers Index, which only includes stocks that have raised their annual dividends in at least each of the past 10 years.
There's a slight twist, however. This underlying index intentionally excludes the highest-yielding 25% of tickers that would otherwise be eligible for inclusion. The thinking is that these oddly high yields are a sign of potential trouble for the underlying company, or perhaps an omen that their dividend is on the verge of being reduced if not outright cut.
It's a reasonable concern. Number-crunching performed by mutual fund company Hartford confirms that since 1930 the market's top-yielding 20% of stocks slightly underperformed the next-highest 20%. More to the point for interested investors, this second quintile of stocks outperformed all others when reinvesting the dividends they were dishing out. They also did so with a little less volatility than the rest of the market's stocks.
Credit the continued cash payments they were generating even when the overall market was tanking, which were used to buy more shares at a discounted price.
The big takeaway: Even if you don't necessarily need or want dividend income right now, stocks that are capable of sustaining their dividend payouts and payment growth tend to be high-quality tickers that are also capable of driving sustained capital gains. You just need a multiyear (if not multidecade) holding period for this to matter in a meaningful way.
Vanguard Growth ETF
Finally, at the other end of the value/growth spectrum you'll find the Vanguard Growth ETF (VUG 0.21%), which would nicely balance out positions in the other two aforementioned Vanguard exchange-traded funds.
Not every investor would immediately agree that this growth-minded ETF will provide such balance, even if it only made up a portion of your portfolio. See, as it stands right now, companies like Apple, Microsoft, Nvidia, and Amazon account for a massive part of this fund's makeup -- amounts that are proportional to these companies' market caps relative to the rest of the market. Its position in Apple stock is more than 12% of the ETF's total value, for instance, while Microsoft makes up nearly 11% of the fund's holdings. If a few weeks' worth of underperformance turns into a few months or even a few years, owners would be understandably frustrated.
However, this is one of those cases in which you need to maintain faith in the general idea of exchange-traded funds as well as this particular ETF's approach.
NYSEMKT: VUG
Key Data Points
Yes, as the market's high-flying darlings fall out of favor this fund could underperform. That's strictly a short-term phenomenon, though. Designed to mirror the holdings of the CRSP US Large Cap Growth Index, you're assured to hold cap-weighted stakes in whichever stocks are outpacing the market as a whole. In most cases, this sort of performance will be rooted in persistent growth that beats the broad market.
Or think about it like this: Nvidia, Apple, and Microsoft weren't always this index's or ETF's top holdings. They grew their way into their current allocations. Growth of the market's proverbial "next big things" and the subsequent displacement of its current top holdings will almost certainly cause this fund to outperform the overall market again.
Just be sure to buckle up for the volatility this fund is sure to dish out in the meantime.
Make it make sense for you
These three ETFs can of course be a complete portfolio in and of themselves, but only if you want 100% exposure to the equity arena. If you're currently more conservative and would rather protect at least a portion of your money by holding safer assets like bonds, by all means do so. It also wouldn't be wrong to own these three funds in addition to a handful of favorite stock picks.
In other words, make it make sense for you.
If you're not quite sure where to start or what to buy next, these are three good options on their own, and even better options when bought as a group.
Just be sure you're willing to leave them alone once you're in. While most stocks eventually set up a compelling exit point, an ETF's holdings are constantly refreshed for you. You'd only want to sell them if your goals or risk-tolerances change.
