While the market has pulled back some, it's still pretty close to all-time highs. However, that doesn't mean investors should sit on their hands. While investors may be tempted to see if this is the start of a pullback, the best strategy remains to stick to a dollar cost-averaging strategy and consistently invest whether we are in a bull market or a bear market.
One of the best ways to implement this strategy is with exchange-traded funds (ETFs), as they can give you an instant, diversified portfolio. Vanguard ETFs are one of the first places investors should look as the investment firm is known as the low-cost leader.
ETFs have what are known as expense ratios that get subtracted from returns to help pay for the fund management and other expenses. These costs, even expense ratios that may seem low on the surface, like 1%, can eat into returns over time. However, the expense ratios of Vanguard funds are typically as low as you will find anywhere.
Let's look at two Vanguard ETFs I'd buy hand over fist and one I'd avoid. We'll start with the ones I'd be buying.
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The Vanguard S&P 500 ETF (buy)
Vanguard built its fund empire on low-cost index funds, and the Vanguard S&P 500 ETF (VOO 0.03%) is its flagship ETF. The fund tracks the S&P 500 index, which is made up of 500 of the largest stocks in the U.S.
This is a market-capitalization (market cap)-weighted index, which means that the larger a company is (share price multiplied by shares outstanding), the larger the percentage of the index it becomes.
The Vanguard S&P 500 ETF probably should be the core holding of almost any individual investor's portfolio. The biggest reason why is that only 14% of actively managed funds have been able to outperform the index over the past decade, so if you can't beat it, you might as well join it.
NYSEMKT: VOO
Key Data Points
With a 14.6% average annual return over this stretch, a scant 0.03% expense ratio, and a diversified assortment of 500 holdings, this an ETF you want to buy and hold for the long haul.
The Vanguard Growth ETF (buy)
While actively managed funds have struggled to outpace the S&P 500 over the past 10 years, the Vanguard Growth ETF (VUG 0.53%) has consistently outperformed its more widely known counterpart. Like the Vanguard S&P 500 ETF, the Vanguard Growth ETF is a market-cap-weighted index ETF. It mimics the performance of the CRSP US Large Cap Growth Index, which is essentially the growth side of the S&P 500.
NYSEMKT: VUG
Key Data Points
Growth stocks have been leading the market higher much of the past two decades, and with artificial intelligence (AI) still in its early stages, this very well could be the case for a long time to come. Over 60% of the ETF's top holdings are in tech stocks, and a third of its portfolio is in market leaders Nvidia, Microsoft, and Apple.
The ETF has generated an outstanding average return of 17.4% over the last 10 years, and it has an expense ratio of just 0.04%.
Vanguard Long-Term Treasury ETF (avoid)
Now, one Vanguard ETF I'd avoid is the Vanguard Long-Term Treasury ETF (VGLT 0.51%). While investing in long-term Treasuries seems like it would be a safe bet, it has been anything but for investors of this fund. The ETF has a scant average annual return of just 0.04% over the past decade and a negative 6.9% return over the past five years.
Now, the big reason for these poor returns is that at one point during this stretch, interest rates rocketed higher as the Federal Reserve began to raise rates and ended quantitative easing. When new Treasuries get issued with higher coupon yields, the prices of older Treasuries typically decline in order for old and new yields to be more aligned.
NASDAQ: VGLT
Key Data Points
Now, I wouldn't expect the same type of negative returns for the ETF moving forward, as in the current environment, the Fed is more likely to lower rates. However, I think stocks will just continue to outperform bonds by a wide margin over the long term.
