If you're a new investor looking to put $1,000 to work in the market right now, one of the best places to start is with an exchange-traded fund (ETF). The reason is because ETFs give you instant diversification without the need to research and pick individual stocks.
For my money, the Vanguard Growth ETF (VUG -0.15%) is one of the best options to consider. Let's look at why this ETF could be good choice over the long run.
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Why the Vanguard Growth ETF is a great investment option
The Vanguard Growth ETF mimics the CRSP US Large Cap Growth Index, which is essentially the growth half of the S&P 500. That means it tilts heavily toward technology and other high-growth names. More than 60% of its portfolio is made up of tech stocks, and another chunk sits in consumer discretionary, which often includes companies that are just as tech-focused. Amazon, for example, is the largest cloud computing provider in the world and designs its own chips, yet it is technically classified as consumer discretionary. The same goes for Tesla, which is pushing forward in autonomous driving and robotics.
The ETF's concentration in top-tier growth stocks is what sets it apart. The "Magnificent Seven" -- which consists of Apple, Microsoft, Nvidia, Amazon, Tesla, Meta Platforms, and Alphabet -- play a big role in the portfolio, making up more than half its holdings. These companies are not just market leaders; they are also at the center of the artificial intelligence (AI) boom. With AI looking like a game-changing technology, these are the stocks you want to own for the next decade.
Given that the ETF owns all the leading AI names, it is one of the most efficient ways to invest in AI, as you don't need to guess which stocks will win the most. The Vanguard Growth ETF gives you exposure to all of the top names, and as a market cap-weighted index fund, it will let the winners ride and the losers fade into the background.
A history of outperformance
The Vanguard Growth ETF's performance, meanwhile, speaks for itself. Over the past decade, the ETF has delivered an annualized average return of more than 17%, easily beating the S&P 500's 14.6% return. Its more-recent returns have been even better. The ETF has produced a 25% average annual return over the past five years, while it's gained 23% over the past year. A $1,000 investment in the Vanguard Growth ETF 10 years ago would now be worth about $4,850, compared to $3,900 in the S&P 500.
The downside to owning the Vanguard Growth ETF is that it is less diversified than the S&P 500, and thus can carry more risk. If the market shifts toward value-oriented stocks, it will likely underperform. However, with AI still looking like it is in its early days, the ETF looks well-positioned over the long term.
Dollar-cost averaging remains key
Now with the market at all time highs, the temptation could be to wait for a pullback, but that's generally not a good idea. The problem is that pullbacks are unpredictable, and sometimes they never come. JPMorgan research found that since 1950, the S&P 500 has hit new highs on 7% of all trading days. Meanwhile, on a third of those occasions, it never traded lower again, meaning waiting for a pullback would have cost you money.
The better strategy is dollar-cost averaging, which is simply committing to invest a set amount of money on a regular basis no matter where the market is. This method takes emotions and guesswork out of the equation. It also means you buy more shares when prices go down, which can boost your overall return. By steadily buying into an ETF like the Vanguard Growth ETF every month, or with every paycheck, you take advantage of compounding and build wealth over time.
