Many exchange-traded funds (ETFs) have very simple investment strategies. They aim to track an index designed to measure the returns of specific asset classes. That makes them ideal investments to hold for the long haul.
Here are three simple ETFs to buy with $1,000 and hold for the rest of your life.
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State Street SPDR S&P 500 ETF Trust
State Street SPDR S&P 500 ETF Trust (SPY 1.28%) is one of the largest ETFs by assets under management, with over $700 billion in assets. The reason so many investors entrust this fund with their capital is its simple investment strategy. It aims to track the S&P 500 index, one of the most prominent market benchmarks that measures the performance of 500 of the largest publicly traded companies.
The S&P 500's annual return has averaged 10% over the last half-century. Investing in the State Street SPDR S&P 500 ETF Trust enables you to capture this return before expenses. This ETF has a very low expense ratio of 0.0945% (about $0.95 per year for every $1,000 invested). A 10% annualized return would grow a $1,000 investment into over $117,000 in 50 years. This ETF's focus on the S&P 500 and low cost make it an ideal core long-term holding.
NYSEMKT: SPY
Key Data Points
iShares Core Dividend Growth ETF
The iShares Core Dividend Growth ETF (DGRO 0.69%) tracks an index comprised of companies with a history of consistently increasing their dividends. Dividend growers have historically delivered strong returns. Over the last 50 years, dividend growers and initiators in the S&P 500 have delivered a 10.2% annualized return according to data from Ned Davis Research and Hartford Funds. That's significantly higher than companies with no change to their dividend policy (6.8% annualized return) and dividend non-payers (4.3% annualized return).
The index that the iShares Core Dividend Growth ETF tracks screens for companies that have increased their dividends for at least the past five years. It also excludes companies with dividend payout ratios above 75% and the top 10% highest-yielding stocks. That helps weed out companies that might struggle to deliver sustained dividend growth in the future. Dividend cutters and eliminators have produced poor long-term returns (-0.9% annualized over the past 50 years). The fund currently has nearly 400 holdings, providing investors with broad exposure to high-quality dividend growth stocks. It also has a 2% yield based on payments over the last 12 months, nearly double the S&P 500's level. As a result, it provides investors with more passive dividend income.
NYSEMKT: DGRO
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The fund's focus on dividend growth stocks has paid off over the long term. It has delivered an annualized return of more than 11% over the past one-, three-, five-, and 10-year periods, as well as since its inception in 2014. The fund has a rock-bottom expense ratio of 0.08%. Its combination of high returns and low costs makes it a great long-term investment.
Vanguard Total Bond Market ETF
Vanguard Total Bond Market ETF (BND 0.30%) provides investors with broad exposure to the taxable investment-grade U.S. dollar-denominated bond market. Investment-grade bonds are high-quality fixed-income investments.
NASDAQ: BND
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Bonds play a crucial role in portfolio diversification. They provide income while helping lower a portfolio's risk profile. Most advisors recommend allocating 40% of a portfolio to bonds (and 60% to stocks) to achieve the best risk-adjusted returns.
The Vanguard Total Bond Market ETF holds nearly 11,500 bonds. Its holdings include U.S. treasuries, mortgage-backed securities, corporate bonds, and those issued by foreign entities. The ETF currently offers a more than 4% income yield and has a rock-bottom expense ratio (0.03%). Its broad exposure to high-quality bonds makes it a great portfolio anchor.
Ideal ETFs to hold for a lifetime
These three ETFs are great complements. SPY can deliver market returns; DGRO offers higher return potential; and BND reduces risk by providing broad bond market exposure. With simple strategies and low costs, they're great ETFs to buy and hold for the rest of your life.
