While many individual stocks have started to bounce back from this latest downturn, the major market indices, such as the S&P 500 and Nasdaq Composite, continue to trade well below their recent highs. This represents a great opportunity for investors who have been on the sidelines to begin investing.
One of the best ways for new investors to get into the market is with exchange-traded funds (ETFs). ETFs trade just like ordinary stocks, and you can buy or sell them throughout the day through a brokerage account. However, each ETF has holdings in several stocks, giving you an instant portfolio. A big advantage of ETFs is that they give you added diversity. They are also a great way to invest if you don't have as much time to research individual stocks.
Vanguard ETFs offer a great place to start because the fund operator runs these funds at a low cost to the shareholder. As a fund, ETFs have expense ratios to run the fund. These fees can eat into an investor's returns over time. They are subtracted daily from the net asset value of the ETF so investors don't notice them, but they add up over time. Vanguard's index fund tends to have among the lowest expense ratios out there, making them a great place for people to invest.
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Two great Vanguard ETFs
Two great Vanguard ETFs to invest in right now are the Vanguard 500 ETF (VOO -0.47%) and the Vanguard Growth ETF (VUG -0.04%). In typical Vanguard fashion, both have minuscule expense ratios. The expense ratio for the Vanguard 500 ETF is just 0.03%, while it is 0.04% for the Vanguard Growth ETF. That means investors get to keep virtually all the returns of these funds over time.
The Vanguard 500 ETF tracks the popular S&P 500 index, which is largely considered the barometer of the U.S. stock market. It consists of the 500 largest stocks by market capitalization (market cap) that trade in the U.S. The larger a company's market cap (its share price multiplied by its number of shares outstanding), the bigger the holding is in the index and the ETF.
The Vanguard Growth ETF, meanwhile, tracks the performance of the CRSP US Large Cap Growth Index. This index is essentially the growth side of the S&P 500. The ETF currently owns around 180 large-cap growth stocks.
Not surprisingly, it is pretty heavily weighted toward the technology sector, with over 57% of its holdings within this sector. However, it is worth noting that some pretty tech-related companies will get classified into other categories. For example, Amazon is classified as a consumer discretionary stock because of its e-commerce operations, even though the majority of its profits come from its Amazon Web Service (AWS) cloud computing segment. So in reality, the ETF is probably even a little higher weighted toward technology stocks.
Both ETFs have a strong track record for performance over the long term. The Vanguard 500 ETF has generated an average annual return of 12.9% over the past 10 years as of the end of February. The Vanguard Growth ETF, meanwhile, comes with a little more risk given its focus only on growth stocks, but it has given investors a little more juice to their returns. The ETF has produced an average annual return of 15.1% over the past decade, as of the end of February.
Data by YCharts.
Dollar-cost average
Investing $100 in these ETFs and holding them forever isn't going to create a lot of wealth in and of itself. To create wealth, you'll need to try to invest at regular intervals like once or twice a month. Over time, that consistent, steady saving and investment returns will begin to add up.
It is also important not to let market movements impact your long-term investing strategy. Over the long haul, the stock market will likely go up, but in between there will be ups and downs. You want to continue to invest through both of these cycles through what is called dollar-cost averaging. When the market is down, your money will buy you more shares, while when the market is higher, you'll continue to ride the market momentum.
Investing in down markets can be scary, but this is often the best time to invest over the long run. Meanwhile, the stock market actually hits a new all-time high on 7% of all trading days, according to a JP Morgan study, and a third of these new highs eventually become new market lows that the S&P 500 never returns to. This is why it's important to invest consistently and not try to time the market.
Making consistent investments in both the Vanguard 500 ETF and the Vanguard Growth ETF has proven to be a good long-term strategy.
