Exchange Traded Funds (ETFs) can be a smart option for many investors. These are low-maintenance, low-effort investments, but by investing regularly, you may be able to accumulate a significant amount of money over time.
It is essential, however, to choose the right ETFs, as some are more dangerous than others. Some funds generate substantial returns but also carry a lot of risk. Others may be safer, but they get dismal returns every year.
Balancing risk and reward can be difficult, but there are three Vanguard ETFs, in particular, that I plan to store as we approach 2022.
1. Vanguard S&P 500 ETF (VOO)
It’s hard to go wrong with an S&P 500 ETF, and the Vanguard S&P 500 ETF (NYSEMKT: VOO) is a strong option. This fund tracks the S&P 500 Index, which means it includes the same stocks as the index itself and aims to reflect its performance over time.
This ETF is an excellent choice for those who wish to limit their risk while maximizing their potential long-term gains. The S&P 500 itself experiences short-term volatility, but it has a very good track record when it comes to recovering from downturns. By investing in this ETF, your portfolio can take a hard hit in the short term if the market is rocky. But in the long run, you are almost guaranteed to see positive average returns.
Historically, the S&P 500 itself has achieved an average rate of return of around 10% per annum. Your actual returns each year will likely be over or under 10%, but over time those annual returns should average around 10% per year.
While an average annual return of 10% may not seem like much, it does add up over time. Suppose, for example, that you invest $ 200 per month in this ETF while getting an average annual return of 10%. After 25 years, you will have accumulated approximately $ 236,000. After 40 years, you would have about $ 1.062 million.
2. Vanguard Total Stock Market ETF (VTI)
the Vanguard Total Stock Market ETF (NYSEMKT: VTI) aims to follow the development of the stock market as a whole. This fund contains 4,156 stocks of small, medium and large companies from various sectors. For comparison, the S&P 500 ETF is made up of around 500 stocks of only large companies.
In general, the more diversified a fund, the lower your risk. This ETF can therefore be a smart option for those who want to invest in stocks while limiting as much risk as possible. When you invest in a wide range of stocks, you are better protected against market volatility.
Again, the stock market as a whole will still experience some short term ups and downs. But history has proven that the market can rebound even after the worst crashes, so even if it gets worse, this ETF is very likely to rebound.
Since its inception in 2001, this fund has earned an average rate of return of just under 9% per year. While this is slightly lower than the S&P 500 ETF, keep in mind that lower risk levels sometimes lead to lower average returns as well. Whether this is a valid compromise will depend on your personal preferences.
3. Vanguard Growth ETF (VUG)
the Vanguard Growth ETF (NYSEMKT: VUG) is riskier than the other two ETFs here, but it also has the highest earning potential.
This ETF only includes stocks that have the potential to grow faster than average, so you are more likely to achieve higher average returns than with an S&P 500 or Total Stock Market ETF. In fact, since its launch in 2004, the Vanguard Growth ETF has averaged almost 12% per year returns.
Keep in mind, however, that this fund can be riskier just because it only contains growth stocks. These stocks tend to have higher average returns, but they can also be more volatile than more established, slower growing stocks.
If you choose to invest in this ETF, it is wise to make sure that the rest of your portfolio is well diversified. You can even invest in this ETF along with, say, the S&P 500 ETF to create more balance in your portfolio. This way, even if the Growth ETF experiences volatility, your overall portfolio should remain relatively stable.
Investing in ETFs can be a fantastic way to build wealth for the long haul, but it is important to choose your investments wisely. While everyone’s situation is different, these three ETFs are some of the strongest in my portfolio and I plan to continue investing through 2022 and beyond.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.