Many investors are scared to put new money into individual stocks right now, and to be fair, it’s completely understandable. If you’re in this group but still want to invest while also sleeping soundly at night, exchange-traded funds (ETFs) could be the best move for you right now.
Here are three excellent ETFs to consider that can produce excellent long-term returns without the stress, research, and ongoing homework that comes with investing in individual stocks. And if you’re an individual stock investor already, these three ETFs can be an excellent diversification tool.
1. A bet on American business
Legendary stock picker Warren Buffett has said several times that the best investment most people can make is a low-cost S&P 500 index fund like the Vanguard S&P 500 ETF (VOO 1.28%). The idea is that this fund is effectively a bet on American business, and that has been a very good long-term bet for centuries.
As the name implies, this ETF simply aims to track the performance of the S&P 500 index over time, which has historically averaged 9% to 10% per year (including dividends) over long periods. It does this by investing in all 500 stocks in the index in the same weights they represent. And like most Vanguard funds, the S&P 500 ETF has a rock-bottom 0.03% expense ratio, which means just $3 for every $10,000 you invest will go toward administrative costs and other fees.
2. Great diversification and lots of income
Another great ETF to consider is the Vanguard Real Estate ETF (VNQ 3.58%). This index fund invests in a basket of real estate investment trusts, or REITs (pronounced “reets”).
Why should you have a real estate index fund in your portfolio? For one thing, real estate returns aren’t well correlated to overall stock market returns, so they can be a nice hedge during bear markets. And REITs have slightly outperformed the S&P 500 over the long run, and with less volatility.
The Vanguard Real Estate ETF owns well over 100 different real estate stocks, and since it is a weighted index, top investments include the largest REITs in the market, such as Prologis, American Tower, and Equinix.
3. A different kind of tech ETF
One problem with most tech ETFs is that they’re weighted, and there are a handful of enormous tech companies. As an example, the most popular Nasdaq ETF, the Invesco QQQ, has 37% of fund assets invested in the four largest tech companies.
The Invesco S&P 500 Equal Weight Technology ETF solves this problem for investors who don’t want so much concentration. The fund owns the 78 tech stocks that are in the S&P 500 index and invests an equal amount of fund assets into each one. This means that a relatively small (and high-potential) company like Paycom Software carries the same weight as a powerhouse like Apple.
So, if you’re looking for tech exposure but don’t want to depend too much on the performance of trillion-dollar companies, take a look at this equal-weight alternative.
What these three ETFs can do for you
As Warren Buffett has said, “It is not necessary to do extraordinary things to get extraordinary results.” By simply buying shares of these ETFs (especially while the market is beaten down) and simply holding on to them for years, you might be surprised at how effectively they can create wealth.
For example, let’s say that you are 30 years old and invest $10,000 in the Vanguard S&P 500 ETF. Based on the historical total returns of the index, your investment could grow to more than $280,000 by the time you’re 65. Now imagine if you actively add a few thousand dollars each year.
Clearly, we’re fans of investing in individual stocks. However, ETFs like these can be excellent wealth generators for patient investors and can provide a great backbone to a portfolio of individual stocks that can help you sleep more soundly during turbulent times.
Matthew Frankel, CFP® has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends American Tower, Apple, Equinix, Paycom Software, Prologis, Vanguard S&P 500 ETF, and Vanguard Specialized Funds – Vanguard Real Estate 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.