The S&P 500 has hit new highs this year, and while that’s wonderful for investors, some experts think the market might be in for a correction. Consider that the average S&P 500 price-to-earnings (P/E) ratio today is nearly 28, which is close to the highest it’s been in 10 years, and well above the five-year average of 26.
One excellent, time-tested strategy for avoiding market volatility and the fear that can come with it is investing in exchange-traded funds (ETFs) that follow indexes. This gives you instant diversification and exposure to top stocks.
There are many options out there, but my picks for this month are the Vanguard S&P 500 ETF (NYSEMKT: VOO) and the Vanguard Growth ETF (NYSEMKT: VUG). Let me tell you why.
There are several ETFs that track the S&P 500, and owning one is a no-brainer for any portfolio that provides secure growth over time. Although there are plenty of successful stock pickers out there, it’s not easy to beat the market every year over a long period. By all means, you should pick your own great stocks and give it a try if you have a bit of an appetite for risk. It can be done.
But having some of your funds invested in an index fund that tracks the market is at least a safety hedge, and that’s an important part of a long-term investing strategy to create wealth.
Image source: Getty Images.
The S&P 500 ETF owns about 500 stocks, just like the index, and is weighted similarly. That means that the largest-cap stocks take up a disproportionate amount of the total. The top holdings are Apple, Microsoft, Nvidia, and Amazon, which collectively make up nearly a quarter of the total. Vanguard’s version has a low expense ratio of 0.03%, compared with similar funds that have an expense ratio of 0.78.
This ETF is up 21% this year, like the index, and it has gained 13% in annualized returns over the past 10 years. If the market corrects or crashes, it will be reflected in the performance of the ETF. But the diversification takes out the risk of any one particular stock getting hit too hard. On the flip side, as the market gains, so do you.
To complement the growth and security of owning an ETF that tracks the full index, I often recommend buying another ETF that’s geared toward higher-growth stocks. The Vanguard Growth ETF is a great choice for a number of reasons.
It’s still highly diversified at about 200 stocks, tracking the CRSP US Large Cap Growth Index. These are the highest-cap stocks in the index, and the “growth” label is a bit of a misnomer since the ETF focuses more on market cap size than growth. It has the same top four holdings as the S&P 500 ETF, but these large-cap stocks collectively account for nearly 40% of the total. Some of its other top holdings include value plays like Visa and Costco Wholesale.
This ETF comes with more risk than the standard S&P 500 ETF because it’s more heavily weighted toward larger tech stocks. However, if you hold through downturns, which are bound to happen, it’s likely to reward you down the line, like it has in the past, outperforming the broader market.
Over the past 10 years, it has gained 15.2% in annualized returns, more than two percentage points better than the S&P 500. The expense ratio is a little higher than the S&P 500 ETF’s at 0.04%, but it’s much lower than the comparable ETF average expense ratio of 0.94%.
Each of these ETFs has its merits, and together, they offer you safety plus growth.
Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $23,324!*
Apple: if you invested $1,000 when we doubled down in 2008, you’d have $42,133!*
Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $420,761!*
Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
*Stock Advisor returns as of November 4, 2024
Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale, Vanguard Index Funds – Vanguard Growth ETF, Vanguard S&P 500 ETF, and Visa. The Motley Fool has a disclosure policy.
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