With the market sitting near all-time highs, a lot of investors may be waiting for a pullback before putting money to work, but that's typically a bad idea. J.P. Morgan found that since 1950, the S&P 500 has hit a new high on 7% of all trading days, so it's actually not that uncommon. And on a third of those occasions, the market actually never traded lower.
Even if you guess a big pullback correctly, you also have to get in before the turn. Often, once a market does crash, investors are left waiting for it to go down further. However, the market's best days often come soon after its worst ones.
A separate J.P. Morgan study found that over the past 20 years, seven of the best 10 days for the market fell within two weeks of the 10 worst days, and that it you missed those big rebounds, you're returns would be cut nearly in half.
That's why it's generally a better move to ignore all the chatter and just use a consistent dollar-cost averaging strategy. You can start with a small amount, like $500, but the key is to keep investing consistently on a monthly basis over a long period of time. Let's look at three index exchange-traded funds (ETFs) you can begin implementing this strategy with right now.
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Vanguard S&P 500 ETF
If you're planning to buy and hold just one ETF, you're best bet is the Vanguard S&P 500 ETF (VOO 0.34%). The fund tracks the benchmark S&P 500, which is made up of the 500 largest U.S. companies and gives you immediate diversification across sectors.
The index is weighted by market cap, meaning the larger a company is by market cap (shares outstanding multiplied by share price), the larger the percentage of the index it is. This creates a Darwinian dynamic of survival of the fittest, where the best stocks rise to the top and become larger components of the index over time, while laggards eventually fade away and get replaced.
This dynamic has led to the Vanguard S&P 500 ETF being a stellar performer over the years. Over the past decade, the ETF has a strong 15.3% average annual return.
Invesco QQQ Trust
Growth stocks have been leading the market higher for the past decade, and the Invesco QQQ Trust (QQQ 0.01%) is a great way to tap into this trend. It mimics the performance of the Nasdaq-100, which is loaded with tech and innovation-focused companies that have driven much of the market's gains during this stretch. In fact, more than 60% of its holdings are in the technology sector.
Given how growth stocks have outperformed over the past 10 years, it should come as little surprise that the Invesco QQQ Trust has outpaced the S&P 500 over this period. However, what is surprising is not only how soundly it has outperformed, but how consistently.
Over the past decade, the ETF has generated an average annual return of 20.3%, while besting the S&P on a 12-month rolling basis nearly 90% of the time. This makes it a great growth ETF to own.
Schwab U.S. Dividend Equity ETF
While it seems like growth stocks always outperform value stocks, that is not the case. There have been long stretches in the past where value has outpaced growth.
This is why taking a position in the Schwab U.S. Dividend Equity ETF (SCHD 0.88%) makes sense. This ETF brings a ballast to most investors' portfolios, which probably have gotten very growth-heavy over the years.
The ETF tracks the Dow Jones U.S. Dividend 100 Index, which isn't a simple set-it-and-forget-it index. Stocks must meet several criteria based on metrics like free cash flow and return on equity to be included, not just dividend yield, and the index undergoes an annual reconstitution, adding and deleting stocks. Last year, it removed 17 stocks and added 20, as it actively looks not to get caught in any value traps.
The ETF currently has a dividend yield of nearly 4%, while it has had an average annual return of 12.2% over the past 10 years, outpacing the average value ETF. That makes it a worthy choice for any well-rounded portfolio.
