If you're looking for a more passive approach to investing but don't want to sacrifice your potential gains, there's an obvious solution -- exchange-traded funds, or ETFs. These of course are pre-selected baskets of stocks bought and sold as a group. With them, you don't need to figure out which individual companies to own or avoid. Your strategy is simply picking the right baskets.
The irony: Simpler strategies often bear more fruit than complex ones built to pick individual stocks.
With that as the backdrop, here's a look at three very different -- but very complementary -- Vanguard exchange-traded funds that just might have a place in your portfolio.
Start with the basics
If you've been an investor for any length of time, then you've almost certainly been advised to start with an index fund reflecting the performance of the S&P 500 (^GSPC -0.21%). The thing is, this really is (still) good advice.
It's all too easy to underperform the broad market by trying to beat it. Even most professionals can't do it consistently, in fact. Numbers crunched by Standard & Poor's indicate that over the course of the past five years a little over 77% of actively managed mutual funds available to U.S. investors lagged the performance of the S&P 500, while for the past ten years, nearly 85% of these funds underperformed the benchmark index.
Connect the dots. By simply holding a stake in the world's best-known market barometer, you're now only guaranteed to match its usually bullish long-term performance -- an average annual gain of just under 10% per year. But you're also more likely to outperform most other investors, including the professionals.
Vanguard's answer to the problem is the Vanguard S&P 500 ETF (VOO -0.15%), which just as the name suggests is meant to mirror the performance of the familiar index. And your returns should indeed be very, very close to the S&P 500's. After all, this fund's annual expense ratio is only 0.03% of the value of your position. Brokerage firm Charles Schwab reports the typical ETF's expense ratio is in the ballpark of 0.25% and in a few cases, considerably more than that.
Oh, it's not a sexy or exciting fund. But that's the point. It's the sort of fund that makes sense as a buy-and-hold investment you have no plans to sell (or even bother watching) in the near term.
Reliable dividend growth can serve more than one purpose
If you're looking for long-term growth, then you've probably dismissed the idea of a dividend-focused ETF. And understandably so. But a closer look at this sliver of the market could change your mind.
As you might imagine, the Vanguard Dividend Appreciation ETF's (VIG 0.19%) chief feature is dividend growth. Built to mimic the S&P U.S. Dividend Growers Index, it only holds U.S. stocks (of all market caps) with a track record of at least 10 consecutive years of annual dividend increases. It also excludes, however, the highest yielding 25% of otherwise eligible tickers since these high yields often indicate an inability to continue growing these underlying payouts.
But its current dividend yield of 1.7% is simply too low to offset the benefit of dividend growth as well as the lack of price-appreciation potential these stocks likely have. That's surprisingly not the case on either front.
As for the presumed, modest dividend growth, this ETF's quarterly dividend payments have roughly doubled over the course of the past decade. As data from mutual fund company Hartford points out, stocks of companies that are willing and able to consistently raise their dividends tend to outperform other stocks (on a net return basis) by a factor of around two to one.
A comparison of the Vanguard Dividend Appreciation ETF's performance with and without dividends being reinvested underscores the argument, too. From a capital-appreciation perspective alone VIG has nearly tripled in value since 2006. Buying more shares using dividends dished out along the way, however, raises its net overall return for this time frame by 44%.
Perhaps the most compelling aspect of a position in this particular Vanguard ETF, however, is that you can turn your dividend-reinvestment option on and off at your leisure without selling the fund and possibly incurring a tax bill as a result. Simply contact your brokerage firm to make the switch.
This sector is likely to continue leading the market
Last but not least, add the Vanguard Information Technology ETF (VGT -0.84%) to your list of exchange-traded funds to buy and hold forever if you've got a couple of thousand bucks you're ready to put to work.
Sector-specific funds obviously bring an element of above-average risk with them -- the risk that a particular sector will run into a cyclical or even secular headwind. The technology sector is no exception to this reality. Indeed, at the very least, the tech sector's stocks consistently dish out above-average volatility.
Let's be realistic, though. As much as most of the world's major sociocultural changes of the past 30 years have been ultimately driven by technology companies, that's not likely to be any different during the next 30. Technology itself is now powerful enough to improve and even create new technologies! That's why these stocks are apt to continue outperforming into the foreseeable future.
But which stocks? That's just it. You don't know. This ETF's biggest holdings right now are Apple, Nvidia, Microsoft, and Broadcom, but that wouldn't have necessarily been the case 30 years ago. These companies grew their way into these spaces, displacing other technology names in the process. These now biggest stocks may also be pushed aside over the course of the coming 30 years by unknown up-and-comers with new and better ideas.
With this ETF that's meant to mirror the cap-weighted collective performance of U.S.-listed technology stocks, you won't need to keep your finger on the pulse of such changes within the technology sector. Vanguard will automatically handle this work with its regular rebalancing of all the positions in the fund.
Just understand that with market-leading stocks you usually tend to get significant volatility. It's still worth it in the long run though.
