Mutual funds can be great -- especially the index fund variety. They are professionally managed and generally hold a variety of securities, and once you plunk your money into them, it's quickly diversified. But many mutual funds charge fees that are higher than necessary, and many have minimum investment amounts, that can be $3,000 or more.
Enter exchange-traded funds (ETFs), which are essentially funds that trade like stocks, meaning that you can buy as little as a single share at a time. And the best index ETFs charge minuscule fees as well.
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Here are some kinds of ETFs to consider for your long-term portfolio, and some ETFs within each category to consider.
The simple answer: An S&P 500 index ETF
To keep things simple, you could invest solely in an index fund that tracks the S&P 500 index, which includes 500 of America's biggest companies -- that together make up about 80% of the entire U.S. stock market. That's really all you need to amass a lot of money -- maybe even millions.
The SPDR S&P 500 ETF (SPY)is one of the best-known S&P 500 ETFs, but the Vanguard S&P 500 Index Fund ETF (VOO) has even lower fees, charging 0.03% annually. One knock against the S&P 500 is that it's market-cap-weighted, meaning that its holdings with the greatest market value, such as Appleand Microsoft, carry much more weight in the index as its smaller components. So consider the Invesco S&P 500 Equal Weight ETF (RSP), which has each component influencing the ETF's results equally.
Other ETF options
An S&P 500 ETF is a great choice, but there are others you can consider as well. Here are seven broad categories with some specific fund suggestions.
1. A growth-stock ETF
If you want to try to juice your returns a bit, you might add a growth-stock-focused ETF to your mix. The Vanguard Growth ETF (VUG)would be a solid choice, as would the Vanguard Russell 1000 Growth ETF (VONG). Those two ETFs each hold several hundred stocks. If you'd like more focus, consider the Invesco QQQ ETF (QQQ), which only holds 100 -- tracking the Nasdaq 100 index, which includes the 100 largest non-financial companies on the Nasdaq Stock Exchange, which include gobs of information technology and communication companies.
2. A dividend-focused ETF
It's hard to beat dividend-paying stocks, as they offer not only regular income but also the chance of stock-price appreciation. The ETFs below aim to hold solid dividend payers. They're listed with their recent dividend yields:
ETF | Recent Dividend Yield |
|---|---|
Schwab U.S. Dividend Equity ETF (SCHD) | 3.35% |
Vanguard Dividend Appreciation ETF (VIG) | 1.93% |
Invesco S&P Ultra Dividend Revenue ETF (RDIV) | 3.34% |
SPDR Portfolio S&P 500 High Dividend ETF (SPYD) | 3.91% |
Data sources: Morningstar.com, Yahoo! Financial.
For context, know that the S&P 500 index recently sported a dividend yield of1.66%.
3. A small-cap ETF
Many people like to include small-cap stocks in their portfolios, because they have so much growth potential. You might do the same via the iShares Russell 2000 ETF (IWM)or the Vanguard Small-Cap ETF (VB).
Another strategy that incorporates small-caps is to invest in an ETF such as the Vanguard Total Stock Market ETF (VTI), which includes almost all of the U.S. stock market, including companies of all sizes.
4. An international-focused ETF
To be well diversified, you might also consider a globally focused ETF, such as the Vanguard Total World Stock ETF (VT), the iShares MSCI International Quality Factor ETF (IQLT), or the Vanguard Total International Stock ETF (VXUS). Note that the last two excludes U.S. stocks.
5. A real estate ETF
Lots of investors would love to invest in real estate, but actually buying properties might seem difficult or just too costly. So consider investing in REITs -- real estate investment trusts. They're stocks of companies that buy and lease out gobs of properties, collecting rental payments. They often focus on one or more niches, such as industrial buildings, warehouses, medical facilities, apartments, retail properties, data centers, office buildings, and more. REITs are required to pay out at least 90% of their income in dividends, so they can offer meaningful income. Consider the Vanguard Real Estate Index Fund ETF (VNQ)or the Real Estate Select Sector SPDR ETF (XLRE), which recently yielded 3.1% and 3%, respectively.
6. A bond ETF
Adding bonds to your mix can make it more diversified, and it's often recommended when you're approaching or in retirement. The Vanguard Total Bond Market Index (BND)or the Vanguard Long-Term Corporate Bond ETF (VCLT)will instantly have your money invested in a wide range of bonds.
7. A niche ETF
Finally, if you're really bullish on any particular industry or region or any other niche of the overall market, consider adding an ETF focused on it. For example, the iShares Semiconductor ETF (SOXX) will spread your money across some 30 semiconductor companies, while the Vanguard Information Technology ETF (VGT)will deliver IT-based returns and the Energy Select Sector SPDR ETF (XLE)will prosper if the energy industry does.
Clearly, there are lots of good ETFs out there, so do consider them for your portfolio, because you're very likely to find ETFs of interest with low annual fees.
Selena Maranjian has positions in Apple and Microsoft. The Motley Fool has positions in and recommends Apple, Energy Select Sector SPDR, Microsoft, Vanguard Dividend Appreciation ETF, Vanguard Growth ETF, Vanguard Real Estate ETF, Vanguard S&P 500 ETF, Vanguard Small-Cap ETF, Vanguard Total Bond Market ETF, Vanguard Total International Stock ETF, and Vanguard Total Stock Market ETF. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
