Building Your Ideal Investment Portfolio with These 3 Vanguard ETFs
Investing doesn't call for a convoluted strategy or constant portfolio scrutiny. Consistently, academic studies unfold that one of the most effective ways to accumulate wealth entails regular dollar-cost averaging into low-cost, passive-managed exchange-traded funds (ETFs) that follow broad market segments.
Vanguard stands out in the ETF sphere thanks to its shareholder-owned structure, driving industry-leading low fees. Crafting an entire portfolio with Vanguard products can lead to returns comparable to, and frequently surpassing, benchmark indices. Allow us to introduce you to three funds that jointly cater for a balanced, long-term investment approach.
Core market exposure
The Vanguard S&P 500 ETF (VOO -0.24%) serves as a faithful representative of the S&P 500, the most prominent benchmark for the U.S. stock market. The fund boasts an exceptionally low 0.03% expense ratio compared to an average of 0.77% for similar funds. The beta of 1 indicates its unflinching adherence to market trends, while the alpha of -0.04 underscores its nearly identical performance relative to its benchmark, after factoring in risk and fees.
The Vanguard S&P 500 ETF's most prominent holdings include Apple at 7.11%, Nvidia at 6.76%, Microsoft at 6.26%, Amazon at 3.61%, and Meta Platforms at 2.57%. A $10,000 initial investment would currently be worth $71,640 with dividends reinvested in a tax-advantaged account, while its current yield stands at 1.17%.
VOO Total Return Level data sourced from YCharts.
Growth potential
The Vanguard Growth Index Fund ETF Shares (VUG 0.07%) targets large U.S. companies with robust growth prospects. It charges a minuscule 0.04% in comparison to the category average of 0.94%. The fund's beta of 1.2 suggests it amplifies market movements by 20%, while its alpha of -2.33 implies slightly lower risk-adjusted returns compared to its benchmark.
In the last 10 years, the Vanguard Growth ETF has posted spectacular returns, with a total return of 341.7%, contrasting with only 68.7% for the Vanguard Total International Stock Index Fund ETF Shares (VXUS -0.76%).
This outstanding performance can be attributed to the dominance of U.S. technology giants, which have built substantial competitive advantages through artificial intelligence, cloud computing, and other technological advancements.
Exploring farther shows that the fund's leading holdings contain more prominent allocations to tech titans, including Apple at 11.71%, Nvidia at 10.94%, Microsoft at 10.80%, Amazon at 6%, and Meta Platforms at 4.70%. A $10,000 initial investment in this Vanguard fund would now be worth $103,860, with dividends reinvested in a tax-advantaged account.
VUG Total Return Level data sourced from YCharts.
Stability through bonds
The Vanguard Total Bond Market Index Fund (BND -0.03%) offers vital portfolio stability through vast fixed-income exposure. It adheres to the Bloomberg U.S. Aggregate Float Adjusted Index, with a beta of 0.99, indicating near-perfect market synchronization, and an alpha of -0.08, showing it closely mirrors its benchmark's risk-adjusted returns.
Shrouded in an expense ratio of only 0.03%, this fund serves as a robust shield against stock market volatility. However, a $10,000 initial investment would now be worth just $16,860 with dividends reinvested, highlighting the comparative underperformance of bonds compared to equities since the new millennium's turn.
BND Total Return Level data sourced from YCharts.
Building your allocation
A long-established rule-of-thumb advises subtracting one's age from 100 to determine their stock allocation, with the remaining portion allocated to safe-haven assets like bonds and cash. Given increased lifespans and the historic outperformance of U.S. stocks, many financial experts now advocate a more aggressive modification of this approach.
Here are some age-based allocation suggestions, subtly tweaked to reflect a more growth-oriented stance:
- Age 20: 90% stocks, 10% bonds
- Age 30: 80% stocks, 20% bonds
- Age 40: 70% stocks, 30% bonds
- Age 50: 60% stocks, 40% bonds
Individual circumstances may warrant adjusting these allocations. Elements like employment stability, alternate income sources, and personal risk tolerance can impact whether one opts for a more aggressive or conservative mix.
Investors may wish to allocate a more significant portion of their stock allocation towards the Vanguard 500 Index Fund for security, and add Vanguard Growth Fund exposure for heightened growth potential. The Vanguard Growth Fund's remarkable outperformance vis-à-vis international stocks underscores the merits of maintaining substantial U.S. exposure, albeit this focus also heightens risk.
Final thoughts
This three-fund strategy delivers numerous advantages through its simplicity, low costs, and demonstrated track record. For investors seeking an uncomplicated way to construct wealth, these Vanguard ETFs provide the essential components of a well-designed portfolio that can be tailored to changing circumstances.
Investing in Vanguard ETFs, such as the Vanguard S&P 500 ETF (VOO) or the Vanguard Growth Index Fund ETF Shares (VUG), can be an effective method of accumulating wealth, given their low fees and consistent performance. In fact, a $10,000 initial investment in VUG, with dividends reinvested, has grown to $103,860 over the last 10 years, demonstrating significant financial gains.
Following academic research, regular investing into low-cost, passive-managed ETFs like those offered by Vanguard can prove to be an efficient strategy for managing finance and growing money.
