Beware of over-trading your way into underperformance.
Many investors foolishly believe they are smarter than the rest of Wall Street. It doesn’t matter how many times investing gurus like Warren Buffett warn against this kind of hubris, or how many sets of data are published to prove how hard it is. Consider that in 2021, a staggering 80% of all U.S. active money managers underperformed a key performance benchmark. If eight in 10 stuffed shirts with MBAs can’t figure out the market, what makes regular folks think they can do it? Rather than strive to be smarter than the Wall Street sharks, most investors should instead take a long-term approach that doesn’t involve trading in and out of assets — and underperforming as a result. The following seven exchange-traded funds, or ETFs, are all good long-term investments you can have confidence in this year, next year and beyond.
Vanguard S&P 500 ETF (ticker: VOO)
Though the SPDR S&P 500 ETF Trust (SPY) is the oldest and most popular S&P 500 index fund out there, VOO remains a more attractive option for most long-term investors, despite only launching in 2010, thanks to a lower cost structure. Specifically, SPY charges 0.095% annually vs. just 0.03% for VOO. Both options are elegantly simple, tracking the S&P 500 index of the largest U.S. companies such as Apple Inc. (AAPL) and Microsoft Corp. (MSFT). And right now, with a massive $270 billion in assets, it can hardly be called an also-ran even if that’s behind the flagship SPY’s tally. All things being equal, a lower cost structure over the very long term will serve you well — and that gives this Vanguard S&P 500 ETF the edge.
Schwab U.S. Small-Cap ETF (SCHA)
There are a handful of small-cap ETFs that have slightly larger asset balances at present, but SCHA is a most diversified and middle-of-the-road fund out there without a bias towards growth or value. The $14 billion fund offers investors a simple way to gain exposure to smaller and midsized companies that might have greater growth potential over mature large-cap holdings like those in the S&P 500 index. Right now, SCHA holds just under 1,800 stocks. A handful edge up against the traditional definition of large stocks, with market values of $10 billion or more, but the vast majority are $2 billion or less — with some as small as a few hundred million dollars in market value. If you want to play the long-term upside for the stock market, a foothold in these up-and-coming stocks is very important.
Vanguard Total International Stock ETF (VXUS)
Looking beyond the size of their holdings, another important factor in picking the best ETFs to buy for a long-term portfolio is geographic diversification. That’s where this “ex-U.S.” fund from Vanguard comes in, with a worldwide approach that includes about 7,800 total stocks — but none that are headquartered in the United States. Admittedly, some of these names will be awfully familiar, like Japan’s Toyota Motor Corp. (TM) or Swiss consumer staples giant Nestle SA (NSRGY). However, these multinationals typically don’t appear in the regular line of domestic ETFs — so if you want extra exposure to established global brands that happen to be located outside our borders, VXUS is a great long-term supplemental holding.
Vanguard FTSE Emerging Markets ETF (VWO)
The prior VXUS fund is very much focused on developed markets like Europe, Canada and Japan. However, another international fund worth considering for those who want international exposure is VWO. This $79 billion emerging markets ETF is more focused on the aggressive economies in Asia and Latin America that may be more volatile in the short term but have significant upside over the long run. The fund boasts 4,500 or so stocks in its portfolio, with allocations currently leaning towards China, India and Brazil. Geopolitical concerns and short-term pressure caused by rising interest rates may admittedly weigh on some of these regions in the months ahead. However, investors who believe in the long-term promise of emerging markets should still consider this fund.
iShares Core U.S. Aggregate Bond ETF (AGG)
The previous picks have all been comprised of stocks, but if you’re looking to add exposure to fixed-income markets then AGG is a very noteworthy long-term holding. It’s the largest exchange-traded bond fund as measured by assets, and one of the top 10 ETFs of any kind on Wall Street. It’s also comprehensive and diversified as an “aggregate” bond fund, with over 10,000 holdings that offer exposure to the full array of the investment-grade bond market, including both government and corporate bonds. This bond fund currently yields 3.2%, roughly double the 1.6% or so offered by the S&P 500 at present. And with a rock-bottom expense ratio of just 0.03%, or $3 on every $10,000 invested annually, this iShares fund is very affordable, too.
iShares iBoxx $ High Yield Corporate Bond ETF (HYG)
Just as growth-oriented investors may want to bias their portfolio towards smaller or emerging market stocks despite the risks, those looking for yield may want to take a more aggressive approach to the bond market. And one way to tap into higher yields is to stake out a position in “junk” bonds that get low marks from credit rating agencies. With over $15 billion in assets, this iShares fund is the most popular ETF if you want to play junk bonds. It is diversified across more than 1,200 holdings, including some corporations that have well-known challenges right now such as battered airline American Airlines Group Inc. (AAL) and second-tier telecom T-Mobile US Inc. (TMUS). But if you have a long-term horizon, the diversified portfolio should smooth out many of the bumps along the way — and of course, you’ll benefit from a 4.6% dividend each quarter.
iShares Core Growth Allocation ETF (AOR)
Don’t want to figure out how to manage multiple holdings among this lineup of long-term ETFs? Well, the iShares Core Growth Allocation ETF takes the guesswork out of things through an “asset allocation” strategy that looks to balance long-term growth with the need for multi-asset diversification. It’s a fund of other funds, with its seven holdings more or less representing the various approaches we’ve discussed so far. Much like a “target date” mutual fund offered by a 401(k) provider, AOR is a hands-off vehicle that aims to take the guesswork out of things and allow you to have confidence in a single position. The cookie-cutter approach may not be perfect for everyone, but you could do worse than hold on to this single $2 billion ETF for the long term instead of juggling several different positions on your own.
7 best long-term ETFs to buy and hold:
— Vanguard S&P 500 ETF (VOO)
— Schwab U.S. Small-Cap ETF (SCHA)
— Vanguard Total International Stock ETF (VXUS)
— Vanguard FTSE Emerging Markets ETF (VWO)
— iShares Core U.S. Aggregate Bond ETF (AGG)
— iShares iBoxx $ High Yield Corporate Bond ETF (HYG)
— iShares Core Growth Allocation ETF (AOR)
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Update 08/10/22: This story was published at an earlier date and has been updated with new information.