5 Best Vanguard ETFs for Long-Term Investment: A Comprehensive Guide

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Introduction

In this comprehensive guide, we will explore the top 5 Vanguard ETFs that are ideal for long-term investment and can potentially turn you into a multi-millionaire, bringing you closer to financial independence. We will also highlight one specific Vanguard ETF that should be approached with caution. Investing in ETFs and holding them for an extended period is a strategy that has the potential to significantly increase your wealth. While short-term market fluctuations can be unsettling, history has shown that over the long term, the odds of doubling, tripling, or even quadrupling your investment increases significantly. So, let’s dive into the 5 best Vanguard ETFs for long-term investment.

1. Vanguard Total Stock Market ETF (VTI)

The Vanguard Total Stock Market ETF, or VTI, is an ETF that seeks to track the performance of the entire US stock market. With holdings in all 4,100 stocks traded on the stock market, this ETF offers broad diversification across large, mid, and small-cap companies. VTI is a passive index fund, meaning it involves minimal manager risk as the stocks are bought and sold based on predefined criteria. Investing in VTI is essentially a bet that US stocks will continue to dominate the world market, a belief supported by historical data. Over the past 50 years, only 10 out of 50 have seen negative returns, meaning investors in VTI have a remarkable 80% chance of making money. As an example, a $10,000 investment in VTI 10 years ago would have grown to over $63,000, with impressive annual returns of 32%, 15% over three years, and 16.8% over five years. Although VTI experienced a significant drop of 50% during the 2007 financial crisis, it recovered within three years and one month. The low expense ratio of 0.03% (or $0.30 per $1,000 invested) makes VTI an attractive option for investors. The sector breakdown of VTI is primarily influenced by the size of the companies, with technology companies constituting 25% of the fund, followed by financial services, healthcare, consumer cyclical, and communication services.

2. Vanguard Real Estate ETF (VNQ)

For investors looking to diversify their portfolio beyond tech-heavy investments, the Vanguard Real Estate ETF, or VNQ, is an excellent option. This ETF aims to track the US real estate market and comprises 171 different stocks. VNQ is a fund of funds, holding stocks that are essentially Real Estate Investment Trusts (REITs). These REITs manage and develop various types of real estate, including commercial, residential, and specialized properties. A $10,000 investment in VNQ ten years ago would have grown to over $29,000 today. In addition to potential stock price appreciation, VNQ offers a 2.5% dividend yield, providing investors with regular income. Despite experiencing a maximum drawdown of 68% during the 2007 financial crisis, VNQ recovered within three years and four months. With a low expense ratio of 0.12% (or $1.20 per $1,000 invested), VNQ is a cost-effective way to gain exposure to the real estate market. The sector breakdown of VNQ is primarily focused on specialized and commercial real estate, with residential real estate and other sectors also represented. The top 10 holdings of VNQ include well-known companies such as Microsoft, Apple, Google, Amazon, and Tesla, which together make up approximately 25% of the total net assets.

3. Vanguard Small Cap ETF (VB)

Investors looking to diversify their large-cap heavy portfolios may consider adding the Vanguard Small Cap ETF, or VB. This ETF seeks to track the performance of the US small-cap index and includes over 1,500 stocks. Small-cap stocks, generally defined as companies with market capitalization between $300 million and $2 billion, historically outperformed large-cap stocks. A $10,000 investment in VB would have grown to over $45,000 today. While large-cap stocks have dominated in recent years, investors who believe this trend may reverse can benefit from small-cap stocks’ potential outperformance. Compared to large-cap stocks, small-cap ETFs tend to be more volatile in the short term. However, the potential for higher returns exists. VB experienced its largest drawdown of 53% during the 2007 financial crisis, recovering within one year and ten months. With a low expense ratio of 0.05% (or $0.50 per $1,000 invested), VB provides cost-effective exposure to small-cap companies.

4. Finding the Right Balance

Investors should be mindful of their overall asset allocation and consider the right balance between large-cap, small-cap, and sector-specific ETFs. Adding the Vanguard Small Cap ETF to a portfolio heavily weighted towards large-cap stocks can provide exposure to up-and-coming smaller companies. Similarly, investors who hold S&P 500 or Total Stock Market ETFs may want to diversify their holdings by adding sector-specific ETFs.

Conclusion

Investing in Vanguard ETFs for the long term can be a lucrative strategy for achieving financial independence. The Vanguard Total Stock Market ETF (VTI), Vanguard Real Estate ETF (VNQ), and Vanguard Small Cap ETF (VB) are just a few examples of ETFs that offer broad diversification and the potential for attractive returns. It’s crucial to carefully consider your risk tolerance, investment goals, and overall portfolio diversification when choosing ETFs. However, with proper research and due diligence, these Vanguard ETFs can play a vital role in building and preserving wealth over time.