Much like mutual funds, exchange-traded funds (ETFs) offer investors the ability to easily invest in large baskets of stocks. But one key way the two types of investment vehicles differ involves their fees. On average, an equity ETF charges investors 0.53% in annual fees, compared to the average equity mutual fund's rate of 1.42%.
When considering an ETF, investors have thousands of options. Some funds mirror specific indexes, while others are base their portfolio choices on characteristics like market cap, geography, or investment style. But if you're interested in funds that take a balanced approach, I'd recommend taking a close look at the Vanguard S&P 500 Growth ETF (VOOG 1.42%), Vanguard Information Technology ETF(VGT 1.51%), and Vanguard Dividend Appreciation ETF (VIG 0.46%). Investing in a combination of these three low-fee ETFs could help you retire as a millionaire -- and remain one.
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Looking for growth in the S&P 500
The Vanguard S&P 500 Growth ETF is well-suited to the needs of long-term investors. It holds a portfolio made up of the companies in the S&P 500 Growth Index, and its performance largely mirrors it. Those growth stocks provide investors with higher potential gains, but they do come with a moderate level of risk.
Many investing experts, including legendary billionaire investor Warren Buffett, suggest that investing in the S&P 500 is a simple way to remove the guesswork of deciding which are the best companies to invest in. However, the S&P 500 includes both growth and value stocks.The S&P 500 Growth Index combs through the 500 or so companies in the benchmark and selects those with higher growth prospects.
Therefore, if it's growth you're looking for, the Vanguard S&P 500 Growth Fund has produced average annual returns of 19% since its inception in 2010, and has exceeded 19% for its one-, three-, and five-year averages on annual returns after taxes.
This high-tech fund offers potentially high rewards, but also higher risks
Many financial experts suggest that if you want to keep during retirement the lifestyle that you became accustomed to while you had a steady paycheck, you need to have between 10 and 12 times your annual income set aside by the time you leave the workforce. That means a household with an annual income of $100,000 would need $1 million to $1.2 million on hand when its breadwinners retire.
But the thought of retiring as a millionaire goes beyond that for some, and the Vanguard Information Technology ETF has the potential to provide greater rewards for those willing to take on more risk. As the name suggests, the ETF focuses on companies in the information technology sector including Apple, Microsoft, and Nvidia which have helped it deliver an average annualized return of 23.6% over the past 10 years -- beating the S&P 500's average annualized return of 14.8% over the same time period.
It does come with a risk level that's at the top end of the scale that Vanguard uses to rate risk for its funds -- 5 out of 5. The information technology sector houses many companies that can be impacted heavily in bear markets. And not all of these companies focus on dividends to help cushion the fall for investors during down years, or provide the diversification that you have with the vast spread of the S&P 500 companies.
But when rebounds come, they are often led by the tech sector, as occurred back in 2019. If you are an investor who is willing to take on higher levels of risk to achieve your financial goals, this ETF has the potential to help you reach them. An investor who starts at age 30 is looking at a potential of around 37 working years during which to invest before retirement. If you can squeeze just $80 a month into this ETF for 37 years, it presents the opportunity to reach the $1 million mark with a total investment cost of $35,500, based on the 14.5% average annual total return the fund has delivered since its inception in 2004.
Retirees might appreciate some reliable dividends to replace their absent paychecks
Many people head into retirement unsure of whether their savings will be enough to last them through it in comfort. If you're fortunate enough to have built up a million-dollar-plus portfolio, the Vanguard Dividend Appreciation ETF can help keep you at that level once you're relying on your investments to cover your expenses. It makes a good addition to any retirement portfolio that's designed to generate steady income, or to profit from the benefits of dividend reinvestment.
The Vanguard Dividend Appreciation ETF tracks the S&P Dividend Growers Index, which focuses on large-cap companies with histories of increasing their dividends regularly. Its holdings include Dividend Kings like Johnson & Johnson, Coca-Cola, and Procter & Gamble, which have been increasing payouts annually for more than 50 consecutive years.
Over the past 10 years, this ETF has performed admirably, providing an average annual return greater than 12% after taxes. Its current dividend yield is 1.74% -- better than the S&P 500's 1.3% as of January. In 2021, the ETF paid out an annual dividend of $2.66 per share, 16% more than in 2020. And, over the past five years, its payout has grown at an annualized rate of 8.6%.
Those quarterly dividends can provide retirees with a steady stream of income to help replace their paychecks. Combined with the S&P 500 Growth ETF, and the Information Technology ETF, it rounds out a balanced approach to investing toward the goal of becoming a millionaire by the time you retire, and to enjoying your gains once you get there.
Jeff Little owns Apple and Nvidia. The Motley Fool owns and recommends Apple, Berkshire Hathaway (B shares), Microsoft, Nvidia, and Vanguard Dividend Appreciation ETF. The Motley Fool recommends Johnson & Johnson and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
