What's the easiest way to build a diversified portfolio? It's simple. Invest in exchange-traded funds (ETFs). Which fund manager offers the lowest cost ETFs? It's not that easy, as there are multiple candidates. But one that immediately comes to mind is Vanguard.
ETFs are particularly suited for use in buy-and-hold investment strategies. Here are three of my favorite Vanguard ETFs that I've bought and held for decades.
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1. Vanguard S&P 500 ETF
Warren Buffett doesn't endorse ETFs the way Good Housekeeping does consumer products. But if he did, I doubt it Vanguard S&P 500 ETF (VOO 0.57%) It would be the first time he has received such an honor from a legendary investor.
Mr. Buffett's Berkshire Hathaway The portfolio contains only two ETFs, with a heavy stake in the Vanguard S&P 500 ETF. The Oracle of Omaha also revealed several years ago that his will directed his family to invest the cash they inherited in a “very low-cost S&P 500 index fund.” Buffett then suggested Vanguard.
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I completely agree with Mr. Buffett. The Vanguard S&P 500 ETF, as its name suggests, owns all the stocks in the world. S&P500 index. The S&P 500 has always gone up over the long term. It is weighted by market capitalization, meaning that companies that succeed and scale up become more prominent in the index, while companies that underperform are eventually replaced. I like this survival of the fittest methodology.
You won't find an S&P 500 ETF cheaper than Vanguard either. The annual expense ratio is only 0.03%. This is the best ETF for long-term holding. Just ask Mr. Buffett.
2. Vanguard Total Stock Market ETF
Want to diversify further? Check out Vanguard Total Stock Market ETF (VTI 0.49%). The Vanguard S&P 500 ETF owns stocks in 500 of the largest U.S. companies, but this Vanguard ETF owns stocks of all sizes. As of December 31, 2024, Vanguard Total Stock Market ETF's portfolio contained 3,609 stocks.
Weighted by market capitalization, the fund's top holdings are the same as the Vanguard S&P 500 ETF (all of the so-called Magnificent Seven stocks are included in the group). Not surprisingly, the Vanguard Total Stock Market ETF's performance is highly correlated with the Vanguard S&P 500 ETF.
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However, during times when small- and mid-cap stocks outperform large-cap stocks, the Vanguard Total Stock Market ETF will be a bigger winner than the Vanguard S&P 500 ETF. Large-cap stocks have dominated in recent years, but that hasn't always been the case.
This Vanguard ETF is very inexpensive to own. The annual expense ratio is 0.03%, compared to the average expense ratio of similar funds of 0.77%.
3. Vanguard Small Cap Value ETF
I also really like it Vanguard Small Cap Value ETF (VBR -0.72%) As a core part of a buy-and-hold strategy. This ETF seeks to track the performance of the CRSP US Small Cap Value Index, which focuses on stocks of small and medium-sized companies that offer attractive valuations.
Vanguard Small Cap Value ETF held 839 stocks at the end of 2024. Although the fund is market capitalization weighted, no stock represented more than 0.81% of the fund's total portfolio. The average price-to-earnings ratio of these stocks is 16.1x, well below the P/E ratios of 27.7x and 26.8x for the Vanguard S&P 500 ETF and Vanguard Total Stock Market ETF, respectively.
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What makes this Vanguard ETF stand out as a great stock to buy and hold for decades? Over the long term, small-cap value stocks have outperformed their peers. . For example, Bridgeway Capital Management found that from July 1926 to August 2024, small-cap value stocks had an average annual return of 14.3%, compared to 10.2% for the broader market. did.
You will have to pay more expenses with this ETF than the other two on the list, but only slightly more. The annual expense ratio is 0.07%. This is still cheap compared to similar funds, which have an average expense ratio of 1.1%.
