Plenty of investors enjoy picking stocks and monitoring a portfolio, and making any merited changes as the needs arise. Owning individual stocks, however, can easily turn into a full-time job if you let it! The longer you do it, the more you start to appreciate a simpler, more passive solution.
If this sounds a lot like you, then it may be time to allocate at least some of your portfolio to exchange-traded funds, or ETFs. And not just the obvious foundational ones like the Vanguard S&P 500 ETF (VOO +1.49%) either -- you can be passive and still give yourself a chance of outperforming the S&P 500.
To this end, here's a closer look at three ETFs from the cost-effective Vanguard family of funds that you can buy today and comfortably hold forever.
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Vanguard Growth ETF
There's no denying that growth stocks regularly dish out gut-wrenching volatility. There's also no denying, however, that it's often worth it in the long run. Growth stocks have consistently outperformed the broad market since the 1990s, and by more than a little.
Credit the technology sector, mostly. A bunch of major technological leaps were made during this stretch, like the advent of affordable wireless telecom, smartphones, flat-screen TVs, cloud computing, high-speed internet, affordable solar power, 3D printing, gene editing, and artificial intelligence (AI), just to name a few. These companies' stocks deserved their massive gains.
NYSEMKT: VUG
Key Data Points
The thing is, this isn't apt to change in the foreseeable future. Led by the technology sector, growth names as a group are likely to continue outperforming the rest of the market indefinitely.
The Vanguard Growth ETF (VUG +1.37%) would be a great way to plug into this dynamic. Although it's based on the broad CRSP US Large Cap Growth Index, more than 60% of its holdings are tech stocks, including Nvidia, Apple, and Microsoft. You get all the upside of being invested in the market's best-performing stocks (whatever they may be at the time) in an easy-to-own package that Vanguard updates for you as needed.
Vanguard Dividend Appreciation ETF
At the other end of the spectrum, consider stepping into the Vanguard Dividend Appreciation ETF (VIG +0.79%) as a means of complementing your stake in the Vanguard Growth ETF. It's a bit more strategic than simply holding a completely different kind of fund, however.
As far as dividend funds go, the Vanguard Dividend Appreciation ETF isn't a great one... at first. You can certainly find far higher yields than this ETF's trailing dividend yield of 1.6%.
If you're buying and holding a fund "forever" though, it implies your time frame is a lengthy one. Your effective yield on your initial investment will be considerably higher just a few years down the road. VIG's quarterly per-share dividend has grown by more than 50% over the past five years, for perspective, and nearly doubled over the course of the past 10 years.
But you just don't need income right now? That's OK. Simply reinvest these dividends in more shares of the ETF paying them, so you'll own even more shares when you're ready to start accepting these distributions in the form of cash.
Or don't. You can also use this regular cash flow to fund other kinds of investments, and still do pretty well with this ETF. The Vanguard Dividend Appreciation ETF's net asset value itself has grown an average of about 10% per year since the fund was launched in early 2006. As it turns out, stocks with a strong track record of dividend growth also often end up producing big gains simply because their underlying companies are strong enough in the first place to reliably grow their dividend payments.
The Vanguard Dividend Appreciation ETF is based on the S&P U.S. Dividend Growers Index, by the way, which requires a minimum of 10 consecutive years of increased dividend payments. Current noteworthy constituents include JPMorgan Chase, Walmart, and Eli Lilly, but also the aforementioned Microsoft and Apple, both of which do pay modest dividends.
Vanguard U.S. Multifactor ETF
Finally, add the Vanguard U.S. Multifactor ETF (VFMF +0.97%) to your list of ETFs to buy and hold forever if you've got a couple thousand bucks you're looking to put to work for a while.
With only a little over $400 million invested in this fund, it's obviously not Vanguard's most popular ETF. Blame the premise, mostly, or maybe even the name. Many investors don't know what "factor investing" is, and don't have time to find out.
It's not complicated, though, and in this instance, it's well worth it.
Simply put, factor investing is just the application of some common-sense criteria to your potential stock picks. These can include limitations like company size or valuation metrics, or more specific factors like institutional ownership or debt loads ... anything that pre-eliminates certain risks and/or pre-qualifies a ticker as a potential investment. In other words, it's a rules-based approach that prevents you from making an emotionally charged, gut-based decision on a stock.
The key factors for being added to the Vanguard U.S. Multifactor ETF's portfolio are low valuation, low volatility, healthy profitability, and proven performance from a stock that meets all the other criteria. In other words, momentum.
And this is curious. A stock's current momentum usually isn't the sort of thing a true long-term investor worries about, since a stock's price doesn't always make sense in the short run. Perhaps it should be something to consider more often, though, particularly in the modern market environment where a stock's pricing can remain nonsensical (in good and bad ways) for long stretches of time. This momentum requirement just ensures investors are actually apt to be rewarded for their disciplined stock picking.
The irony is, this approach has worked exceedingly well since this ETF's launch back in early 2018. It's not only kept up with the S&P 500 during this stretch, but has usually outperformed it.
NYSEMKT: VFMF
Key Data Points
This performance is mostly a testament to the power of holding proven stocks of high-quality smaller companies. See, VFMF's holdings' median market cap is a mere $12 billion, meaning it owns a lot of mid-caps and small-caps.
Perhaps more important to interested investors, Vanguard handles all the complicated maintenance work a fund like this requires ... work that most stock-picking investors would like to do for themselves, but just don't have the time to.
