Choosing the right investments is key to building wealth in the stock market, but that’s often easier said than done — especially when there are countless stocks and funds to choose from.
Exchange-traded funds (ETFs) can be a smart option for those looking for a low-maintenance investment that requires less research and upkeep. Each ETF contains dozens or even hundreds of stocks, all bundled together into a single investment.
While there’s no single right way to invest, there are two Vanguard ETFs that I personally own and will continue to buy forever. Here’s why they make such great investments.
1. Vanguard S&P 500 ETF
The Vanguard S&P 500 ETF (VOO) tracks the S&P 500 index, and it contains roughly 500 stocks from some of the world’s largest companies — from tech giants like Apple and Amazon to century-old brands like Procter & Gamble and Coca-Cola.
When you invest in just one share of this ETF, you’ll instantly own a stake in all 500 of these companies. Not only does this provide immediate diversification, but because the companies within the S&P 500 are among the best of the best, it’s also far more likely your investment will recover from market downturns.
Historically, there’s also never been a bad time to invest in an S&P 500 ETF. Analysts at Crestmont Research examined the index’s rolling 20-year total returns throughout history, and they found that every single period ended in positive total returns.
This means that if you had invested in an S&P 500-tracking fund at any point in history and simply held it for 20 years, you’d have made money — regardless of how volatile the market was during that time.
Also, the Vanguard S&P 500 ETF specifically has the advantage of a rock-bottom expense ratio of just 0.03% per year. This is far lower than many similar ETFs, and it could potentially save you tens of thousands of dollars in fees over decades.
2. Vanguard Growth ETF
The Vanguard Growth ETF (VUG) contains 222 stocks with the potential for above-average growth. This type of fund is designed to earn higher returns than a broad-market fund like an S&P 500 ETF, but it comes with its risks, too.
Growth ETFs, in general, tend to be more volatile than broad-market funds. High-growth stocks often see more extreme ups and downs in the near term, and with around half of the stocks in this ETF from the tech sector, the periods of volatility can be brutal.
However, this ETF also has a history of earning higher average returns than the S&P 500 over the long haul. Over the past 10 years alone, the Vanguard Growth ETF has earned an average annual return of 13.55% (compared to the Vanguard S&P 500 ETF’s 11.86% average annual return in that time).
While that may not seem like a major difference, it can add up over time. Say, for example, you’re investing $200 per month. Let’s also say that with an S&P 500 ETF, you’re earning a 10% average annual return (which is in line with the market’s historic average). With a growth ETF, say you’re earning a 12% average annual return.
Over time, here’s approximately how much you could accumulate in both scenarios:
To determine which ETF is the best fit for you, consider your risk tolerance and investing goals. S&P 500 ETFs tend to be safer and less volatile, but because they’re designed to follow the market, they can only earn average returns.
If you’re looking to earn higher returns, a growth ETF is more likely to help you achieve that goal. These ETFs can be more volatile in the short term, however, and there are no guarantees they’ll actually beat the market. Before you buy, be sure you’re OK with higher levels of risk in exchange for those potentially higher returns.
Everyone’s investing preferences will differ, so there’s no one-size-fits-all investment that will work for every investor. But the Vanguard S&P 500 ETF and Vanguard Growth ETF are two powerhouse funds with loads of advantages, and I’m planning on keeping them both in my portfolio for as long as possible.
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Source: The Motley Fool