One of the first things people get advised on when it comes to investing is the importance of diversification. It's the classic "Don't put all your eggs in one basket" thought process, in money form. A well-rounded portfolio should ideally contain dozens of stocks, giving you exposure to many different areas of the business world.
Luckily, this is easy to accomplish by taking advantage of exchange-traded funds (ETFs), which let you invest in many companies with a single investment. If you're looking to accomplish a well-rounded portfolio, the following four Vanguard ETFs can cover a lot of ground and get the job done.
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1. Vanguard S&P 500 ETF
The Vanguard S&P 500 ETF (VOO 1.53%) is one of the best investments the average investor can make because it checks off three major boxes: Diversification, cheap price, and proven long-term results (around 10% annual long-term returns historically).
While the S&P 500 isn't as diversified as it has historically been due to the rise of big tech stocks, it still includes companies from every sector. Many of these companies are market leaders with a lot of influence, which is why investing in an S&P 500 ETF like VOO is often seen as investing in the growth of the U.S. economy.
The S&P 500 and U.S. economy may not be directly tied together, but you can generally expect the S&P 500 to perform well when the U.S. economy is growing and in a good place.
NYSEMKT: VOO
Key Data Points
VOO is also one of the cheapest ETFs on the market (0.03% expense ratio), offering a low-cost way to invest in some of America's top companies at once. Of the four ETFs in this article, VOO would ideally be a portfolio's largest holding.
2. Vanguard Russell 2000 ETF
Whereas the S&P 500 is the index for large-cap stocks, the Russell 2000 is the go-to index for small-cap stocks. It tracks the smallest 2,000 companies in the broader Russell 3000 index, which typically have a market cap between $250 million and $2 billion.
Investing in the Vanguard Russell 2000 ETF (VTWO 2.14%) is somewhat of a risk-reward trade-off. Since smaller companies tend to be more susceptible to broader economic conditions and often lack as many financial resources, they carry more risk. However, the small size is also why they often have higher growth opportunities.
NASDAQ: VTWO
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Small-cap stocks historically do well when the economy is in the beginning stages of a recovery or when interest rates are falling. I wouldn't lean too heavily on small-cap stocks, but having a small portion of your portfolio dedicated to them can help you capture this growth opportunity.
3. Vanguard Mid-Cap ETF
The Vanguard Mid-Cap ETF (VO 1.72%) is the sweet middle ground between the S&P 500 (large-cap) and Russell 2000 (small-cap).
At their sizes, these companies have a proven business model, so they're not as risky as small-cap companies. Still, there is plenty of growth potential if a company wants to expand into new markets. In some cases, though, you'll find that these companies are leaders in a specific niche and prefer to operate only in that space. Notable names in VO include Robinhood Markets, DoorDash, Roblox, and Allstate.
NYSEMKT: VO
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VO is also diversified, but most of its companies are from the industrial (19.3%), consumer discretionary (15.3%), financials (13.6%), technology (12.7%), and utilities (9.5%) sectors. Where it might lack in hypergrowth opportunities, it makes up for with a dividend yield that has averaged a higher percentage than the S&P 500 over the past decade.
4. Vanguard Total International Stock ETF
A truly well-rounded portfolio should include both American and international companies, as geographic diversification is important to hedge against slumps in the U.S. economy. With the Vanguard Total International Stock ETF (VXUS 1.99%), you're getting exposure to companies in both developed and emerging markets. This is a similar risk-reward trade-off to that of small-cap stocks, with developed markets offering greater stability and emerging markets offering more growth opportunities.
NASDAQ: VXUS
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This international ETF typically outperforms the S&P 500 during times when the U.S. economy is stagnant or there's uncertainty surrounding U.S. politics. Last year is a good example, with VXUS outperforming the S&P 500 by around 28% to 16%.
I wouldn't invest in the Vanguard Total International Stock ETF expecting it to consistently outperform the S&P 500, but it's a good security to hold during times like those mentioned above. I generally recommend keeping around 10% of your portfolio in international stocks. I still believe the U.S. economy (via VOO) is a better long-term choice, but 10% is sufficient to provide a good safety net and ensure you don't miss out on great opportunities abroad.
