What Are Vanguard ETFs and Which Ones Are Worth Investing In?

TradingKey - Because of ETFs, you no longer have to gamble your future away on only one or two stocks in the stock market. For example, while Nvidia (NVDA) stock has gone up oby ver 1,380% in the past 5 years, the same amount of time, Intel (INTC) stock has declined by roughly 12%. That’s risky since you have all your “eggs” in one basket with only one company. 

The wide variety of low-cost funds offered by Vanguard allows you to spread your risk across many companies (hundreds or thousands) so that, whether you are starting with $500 or $1,000, you can still be able to participate in many of the largest/greatest performers in the market without having so much stress about the amount of money you have invested.

The Vanguard index-based products are a category of funds that have been developed by the Vanguard Company. The Vanguard ETFs offer investors low-cost investment options combined with the ability to buy and sell their holdings as they would a share of an individual company.

Currently, there are over 50 different Vanguard ETFs for U.S. investors, and they can be traded on U.S. Exchanges. 

For example, the NYSE or NASDAQ. They track many different types of markets, including both domestic and international indices, as well as individual sectors such as materials and energy.

Vanguard ETFs were formerly known as Vanguard Index Participation Receipts (VIPERS) but are now classified as ETFs and have a goal of tracking the performance of their corresponding indices as closely as possible while allowing for intraday trading of shares.

Vanguard has created this product to expand the variety of products it offers to passive investors and thus continue its history of being a leader in passive investment strategies.

ETFs offer diversification that traditional mutual funds cannot provide. For example, an ETF can provide direct exposure to multiple investments in one fund while also providing more control over individual investors' portfolios.

The Vanguard S&P 500 ETF (VOO)—also referred to as the Vanguard 500 ETF—tracks the largest market index comprised of roughly the 500 largest companies in the United States. 

Although the U.S. economy and this index function independently from one another, VOO provides an effective means for investors looking for long-term exposure to the economy's growth potential. 

Currently, VOO is very heavily weighted towards technology (approximately 36% of the fund) and has 9 of its 10 largest holdings in that sector, but it also has significant representation from all other industries, although there is no shortage of blue-chip companies. 

Some of the financials included in the fund are JPMorgan Chase (JPM) and Visa (V); some of the health care leaders are Eli Lilly (LLY) and Johnson & Johnson (JNJ); and some of the consumer staples are Coca-Cola (KO)and Walmart (WMT), among many others. 

VOO's expense ratio is 0.03%, meaning you'll only pay $0.15 per $500 invested and/or $0.30 per $1,000 invested; therefore, most of your profits will remain in your pocket. 

Overall, VOO provides long-term investors with 3 key characteristics: 1) broad diversification; 2) proven historical performance; and 3) extremely low expense ratios—but it's not as diversified today as it was in years past.

For those that exhibit strong financial performance and growth potential, including a significant combination of financial services and technology, the Vanguard Growth ETF (VUG) is a great option. Over 63% of the fund is invested directly into the technology sector, and just over 17% is invested in consumer discretionary. There are also significant investments in industrials and healthcare (approximately 7.7% and 5.9%, respectively).

Since its inception (January 2004), VUG has returned 874%, compared to 490% for the S&P 500 index; in fact, the outperformance of VUG relative to the S&P 500 has been increasing over the last decade due to large technology companies delivering strong results and dominating the market.

Investors should not expect average annual returns of 16% to continue indefinitely, but achieving an average annual return of 10% would allow an initial $500 investment to grow in value (to approximately $1,000) after just 7.2 years. VUG has over 300 underlying holdings that capture the larger US growth companies, tracking the CRSP US Large Cap Growth Index. These holdings include established companies (e.g., Nvidia, McDonald’s (MCD), and Costco (COST)), which have provided VUG with continued volatility.

Finally, VUG has a low total expense ratio (0.04% versus approximately 0.93% for similar funds), making it an affordable investment on a per-share basis. Although the daily fluctuations of the VUG price can create lots of noise, the important factor is the long-term performance of the fund.

The Vanguard Information Technology ETF (VGT) provides exposure to over 300 large and small technology firms by tracking the MSCI US Investable Market Information Technology 25/50 Index, including significant players in the artificial intelligence space (e.g., Nvidia, Microsoft (MSFT), Alphabet (GOOGL)) as well as emerging themes in smaller names such as IonQ (IONQ). 

No matter how the next tech cycle plays out, VGT gives you access without you having to guess who will be successful, thanks to its low expense ratio of 0.09% compared to the industry average of 0.94%, which means on a $1,000 investment you will pay approximately $0.90 per year.

Investors looking for yield can turn to the Vanguard High Dividend Yield ETF (VYM) to provide exposure to companies expected to pay high dividends over the next year, and it does not include REITs in its holdings. The five largest stock positions are:

• Broadcom (AVGO) – (8.69%)
• JPMorgan Chase – (4.06%)
• ExxonMobil (XON) – (2.34%)
• Johnson & Johnson – (2.32%)
• Walmart – (2.24%)

VYM is designed to provide a steady income through dividends. The trailing twelve-month yield is now approximately 2.4%, down from an average yield of roughly 3% over the last ten years. 

While the decline in the current yield relative to historical levels has been partly due to extraordinarily high yields during the pandemic, VYM’s yield is still double the yield of the S&P 500 and should generate approximately $12 per year on a $500 investment if the current yield remains at 2.4%. This amount will compound at a faster rate if you reinvest your dividends. 

If an investor is more interested in dividend growth than in cash yield alone, the Vanguard Dividend Appreciation ETF (VIG) invests in companies that have increased their dividend for a minimum of 10 consecutive years and have the financial ability to sustain future dividend increases. 

The current yield for VIG is approximately 1.6% and has averaged approximately 1.7% over the last 5 years, trailing other dividend ETFs. However, the growth trend in dividends paid by VIG has been impressive, with dividend payments growing by over 82% over the past 10 years. As holdings pay dividends on varying schedules, VIG’s dividend distributions will not appear as smooth as would occur with the single stock, but they have and will continue to appreciate over time.

With the Vanguard Total International Stock ETF (VXUS), you can invest in the global economy through more than 8600 companies throughout the developed and developing countries of the world. 

The geographic breakdown for VXUS is approximately 37.5% Europe; 27.6% developing countries; 26% Asia-Pacific countries; 7.7% North America, excluding the USA; 0.7% the Middle East, and 0.5% Other. 

While investing in only the US economy has proven to be a successful long-term investment strategy, it is also wise to diversify your investments. A good baseline for most people will be around 10% international within a portfolio, because this can provide a hedge to the portfolio during times of US economic slowdowns or recessions.

Investors can’t avoid missing out on many of the best performers in the stock market by simply investing in exchange-traded funds (ETFs) that provide a diversified range of securities without having to select individual companies actively. 

The following Vanguard funds are great examples: VOO, VUG, VGT, VYM, VIG, and VXUS. The funds provide excellent all-around diversification, low fees, and include some of the leading companies within each category over long-term time periods, regardless of whether you start with $500, $1,000 or some other amount.

In addition, the combination of the above ETFs allows for U.S. bluemist companies, growth-oriented companies, innovative technology firms, and dividend-paying companies, as well as an international component to be represented in your portfolio. 

As such, one can spend little time (and less than $5) on investing today while taking advantage of the effects of both time and the compounding of capital over the many years to come. This is why they continue to rank consistently as some of the best Vanguard ETFs available to build wealth and provide peace of mind.