Whether you're new to investing or have years of experience, buying exchange-traded funds (ETFs) can be a smart way to build your portfolio. They offer instant diversification and can even give you targeted exposure to specific sectors.
Some of the best ETFs are managed by Vanguard, a portfolio management company known for its low costs. Even seemingly small fees can add up over time, so Vanguard's low expense ratios make its ETFs a great starting point for retail investors. Any amount will do if just starting out, but $500 can be a great initial investment. After that, investors will want to consistently add to their holdings through a dollar-cost averaging strategy to get the most bang for their buck.
Let's look at four Vanguard ETFs an investor might want to put $500 into with the intent to buy and hold for the long term.
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1. Vanguard S&P 500 ETF
The Vanguard S&P 500 ETF (VOO 0.45%) is the largest ETF in the world, and for good reason. The fund tracks the performance of the S&P 500 (^GSPC 0.42%) index, which consists of approximately the 500 largest companies that trade in the U.S. by market capitalization (share price multiplied by shares outstanding). The S&P 500 is a market-cap-weighted index, which means that the larger a company's market cap is, the greater the percentage of the index it becomes.
The S&P 500 is generally considered a proxy for the U.S. stock market, and few fund managers have been able to beat the performance of the index over the long term. This ETF has had strong returns throughout the years, generating an average annual return of 12.3% over the past decade, as of the end of April.
2. Vanguard Mega Cap Growth ETF
If you're like me, you might be interested in an investment that has the potential to outperform the S&P 500 without too much additional risk. That is where the Vanguard Mega Cap Growth ETF (MGK 0.21%) comes in. This ETF tracks the performance of the CRSP US Mega Cap Growth Index, which consists of around 70 of the largest growth stocks that trade in the U.S.
These are huge companies that are continuing to see strong growth. Perhaps not surprisingly, this ETF is overweight on tech stocks, which make up just over 60% of its portfolio. Next are consumer discretionary stocks at around 20%. Its top five holdings -- Apple, Microsoft, Nvidia, Amazon, and Meta Platforms -- represent over 47% of its holdings.
This ETF has been a great long-term performer, clocking an average annual return of 15.3% over the past 10 years.
Data by YCharts.
3. Vanguard Information Technology ETF
Vanguard's best-performing ETF over the past decade, though, has been the Vanguard Information Technology ETF (VGT +0.04%). Technology and artificial intelligence (AI) continue to shape the world we live in, and if you want some added large-cap tech exposure, this could be the investment for you.
Now, it's not an investment I'd make in isolation, as it is a sector-specific fund whose top three holdings (Apple, Microsoft, and Nvidia) make up over 45% of its portfolio. As such, it carries more risk than a more broadly based ETF such as the Vanguard S&P 500 ETF.
However, its performance speaks for itself. This ETF has produced an average annual return of 18.9% over the past decade.
4. Vanguard Dividend Appreciation ETF
The preceding three ETFs all have a lot of tech exposure. If you're looking for a little less, the Vanguard Dividend Appreciation ETF (VIG 0.60%) is a solid option. This ETF tracks the performance of the S&P U.S. Dividend Growers Index, which consists of companies with a strong track record of increasing their dividends.
To qualify for the index (and thus the ETF that tracks it), a company must increase its dividend every year for at least 10 years. The index is partially weighted by market cap, but individual stocks are capped at a 4% weighting, meaning they can't account for more than 4% of the overall portfolio. The index also excludes the top 25% highest-yielding eligible companies from its portfolio to lower the chances of including stocks that could potentially be yield traps. Technology is still this ETF's largest sector, accounting for 22.7% of its holdings, but it's closely followed by financial at 22.5% and healthcare at 17.3%.
This ETF has been a solid performer throughout the years. It has generated an average annual return of 11.2% over the past 10 years. Its diversified portfolio and mix of growth and value stocks that pay dividends minimize risk.
