Finding a compelling exchange-traded fund (or ETF) usually isn't too tough to do. But finding one you can buy and hold forever is a slightly different story. Although most exchange-traded funds are well-suited to be long-term investments, the underlying themes of "forever" ETFs need to be timeless, and capable of performing well regardless of the backdrop.
Here's a closer look at three Vanguard ETFs that will work for almost anyone's portfolio right now, several years from now, and even several decades from now.
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Vanguard S&P 500 ETF
It's such a common suggestion that it's almost become cliché. Nevertheless, clichés usually become clichés for good reason. That is, they're either proven to be true, or wise, or helpful.
So what's the common suggestion in question here and now? Build your portfolio on a broad, foundational holding like the Vanguard S&P 500 ETF (VOO 1.19%) meant to mirror the entire S&P 500. Assuming its long-term track record is an indication of how it will perform in the future, this index-based investment should produce average annual gains of about 10% per year.
Just bear in mind that some of those years will be terrible. You'll just have to ride these losing years out, recognizing recoveries always eventually materialize.
NYSEMKT: VOO
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No, it's not exciting. But that's OK. You don't want exciting -- you want productive. With "exciting" you'll face temptations like locking in gains after a big rally and then attempting to step back in after a sizable setback -- a strategy that not even most mutual funds, hedge fund managers, and individual speculators are able to successfully execute with any consistency.
For perspective, data from Standard & Poor's indicates that most mutual funds available to U.S. investors consistently underperform their benchmark indexes in three, five, 10, and 15-year time frames, while hedge funds fare no better.
The point is, rather than trying to do with your money what most professionals can't even do with anyone's money, your highest-odds bet is betting on the broad market with at least a healthy-sized portion of your portfolio.
Vanguard Information Technology ETF
The stock market's various sectors fall in and out of favor. And not just in sync with the economic cycle. Long-lived sociocultural (secular) trends can work for or against entire industries as well. This dynamic can make it tough to stick with certain stocks for the long haul.
There's one group of stocks that's dished out market-beating performance for some time now, however, and is likely to continue doing so. That's the technology sector. The changes these companies are driving are just too big and too important to not make a point of capitalizing on them.
Built to reflect the performance of the MSCI US Investable Market Information Technology 25/50 index, the Vanguard Information Technology ETF (VGT 1.64%) will do the job nicely.
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If you're a student of the market's inner workings, then you probably already know that a small handful of AI-centered technology stocks have not only led the market for the past few years, but have become a dangerously dominant piece of the total market itself. As of the latest look, the S&P 500's 10 biggest companies account for 40% of its total market cap, while the top five of the Nasdaq-100's constituents make up more than half of its total value (according to numbers from Slickcharts).
If the artificial intelligence bubble bursts, it could take a similarly oversized toll on the entire technology sector -- not to mention the overall market. Of course, even beyond the immediate risk, these kinds of imbalances are apt to take shape time and time again. It's just the nature of the market.
The Vanguard Information Technology ETF is reasonably well shielded from such extreme moves, though. See, with the underlying "25/50" index, no single company can make up more than 25% of the fund's total value, and perhaps more importantly, the sum of all the individual company weightings above 5% of the portfolio's total value can't exceed 50%. If and when it's going to happen, Vanguard sells off these positions until a lower-risk balance is restored.
Vanguard Dividend Appreciation ETF
Finally, if you've got a couple thousand bucks you're ready to put to work indefinitely, consider the Vanguard Dividend Appreciation ETF (VIG 0.84%) as way of rounding out your portfolio with something completely different.
Just as the name suggests, this fund's purpose is buying and holding stocks that reliably raise their dividend payments. The S&P U.S. Dividend Growers index it's meant to mirror requires a minimum of 10 consecutive years of yearly dividend increases, including names that aren't necessarily large caps.
It also excludes the one-fourth of otherwise-eligible companies with the very highest of dividend yields, since unusually high yields are common for companies facing serious challenges, or limited growth opportunities.
The end result is a basket of high-quality dividend payers with relatively modest yields. For reference, the Vanguard Dividend Appreciation ETF's trailing dividend yield right now is a mere 1.6%.
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But your portfolio doesn't need any dividends at all right now? That's OK. This is not the ETF's chief value to anyone at this time. The primary reason investors not seeking income still might want to own this fund right now is that it's mostly a value fund consisting of high-quality tickers at a time when these names may be on the verge of falling back into favor. The dividends -- and dividend growth -- due in the meantime are just a nice add-on.
Number-crunching done by mutual fund company Hartford puts things in perspective. Since 1973, stocks of companies that reliably raise their dividend payments ultimately deliver better average net returns of a little more than 10%, versus less than half that number for non-dividend payers. And, they do so with less volatility.
This is clearly counterintuitive. What gives? Hartford's researchers explain: "Corporations that consistently grow their dividends have historically exhibited strong fundamentals, solid business plans, and a deep commitment to their shareholders."
Hartford goes on to point out that the companies seemingly dishing out the very biggest dividends often end up undermining themselves, by overcommitting money to dividend payments that should actually be used to invest in growth. That's the big reason the S&P U.S. Dividend Growers Index doesn't include the market's very highest-yielding tickers -- these big yields are often unsustainable.
