Over the long run, you’d have a hard time finding a better wealth creator than the stock market. Despite the volatility we’ve witnessed over the past 16 months, the annualized average total return of stocks has outpaced the likes of bank certificates of deposit (CDs), bonds, gold, oil, and home prices over the long term.
Nevertheless, bear markets can be unpredictable in the short term, and the velocity of downside moves can be nothing short of unnerving. It can lead investors to seek out avenues of safety in a turbulent trading environment. That’s where exchange-traded funds (ETFs) come into play.
An ETF is a basket of securities held in a single fund that’s managed by experts and traded on a major stock exchange. There are more than 3,000 different ETFs for investors to choose from, each with its own focus and/or goals. If you want to own stocks in a specific region of the world, growth or value stocks, dividend stocks, or companies of a specific market-cap size or within a particular sector or industry of the market, there’s a good chance there’s an ETF for you.
The best thing about ETFs is they allow for diversification or concentration at the click of a button. Since they’re traded on major U.S. stock exchanges, they tend to be highly liquid (i.e., you can buy and sell as needed) and offer relatively low net-expense ratios — i.e., the cost you pay annually as an investor for access to a fund. In general, the more active a fund is with regard to buying and selling securities, the higher the net-expense ratio.
Even with a possible U.S. recession on the horizon, four magnificent ETFs that are proven moneymakers stand out as no-brainer buys right now.
1. and 2. Vanguard S&P 500 Index Fund and SPDR S&P 500 ETF Trust
The first two phenomenal ETFs that are begging to be bought are the Vanguard S&P 500 Index Fund (VOO) and SPDR S&P 500 ETF Trust (SPY). The reason I’ve chosen to discuss these two funds together is because they’re both index funds attempting to mirror the performance of the benchmark S&P 500 (^GSPC).
Something you might not realize about the S&P 500 is that the index has undergone 39 separate double-digit percentage declines since the start of 1950. This works out to a decline of at least 10%, on average, every 22.5 months.
On the flipside, all previous corrections, crashes, and bear markets in the S&P 500 have eventually been put into the rearview mirror by a bull market. As long as you’ve let time work its magic, both the Vanguard S&P 500 Index Fund and SPDR S&P 500 ETF Trust have been long-term moneymakers.
To add to the above, the S&P 500 has been the closest thing to a guaranteed moneymaker over the long run. Market analytics company Crestmont Research analyzed the rolling 20-year total returns, including dividends paid, of the S&P 500 dating back to 1900. This gave Crestmont 104 individual ending years (1919-2022) of data.
What its dataset showed was that if an investor, hypothetically, purchased an S&P 500 tracking index and held that position for at least 20 years, they made money, without fail, all 104 rolling 20-year periods. Notably, investors would have averaged an annualized total return of between 9% and 17.1% in approximately half of the 104 ending years. Investors didn’t just pace the rate of inflation — they often crushed it!
If there’s a slight edge between these two index funds, it goes to the Vanguard S&P 500 ETF, which has a net-expense ratio of just 0.03%, compared to 0.09% for the SPDR S&P 500 ETF Trust. This means the Vanguard fund will cost only $0.30 in fees for every $1,000 invested. Ultimately, though, both S&P 500 index funds are proven moneymakers.
3. Vanguard Growth ETF
A third ETF that’s been nothing short of a sure thing for patient investors is the Vanguard Growth ETF (VUG). While it wins no awards for the originality of its name, this innovation-driven ETF has averaged a stellar annualized return of 9.91% since its inception in late January 2004, as of April 30, 2023.
With the Federal Reserve modeling a mild recession into its forecast for later this year, the idea of putting your money to work in cyclical tech stocks might not sound palatable. However, the Vanguard Growth ETF has a few tricks up its sleeve.
To start with, it attempts to replicate the performance of the CRSP U.S. Large Cap Growth Index. In other words, this is a fund that’s buying some of the biggest and most-proven innovators on the planet. As of the end of the first quarter, the median market cap of its holdings was nearly $300 billion.
To add to the above, the Vanguard Growth ETF owned stakes in 241 different securities, as of March 31, 2023. Investors are getting instant concentration in higher-growth, domestic-industry leaders with just the click of a button.
What’s more, growth stocks have a rich history of outperforming when the U.S. economy weakens. Although a Bank of America/Merrill Lynch study found that value stocks outperformed growth stocks on an annualized return basis over a 90-year period (1926 to 2015), it was growth stocks that ran circles around value stocks during periods of turbulence and early bull markets.
A final reason investors can be excited about this outperforming ETF is its minimal cost. The Vanguard Growth ETF sports a net-expense ratio of only 0.04%. That compares to the average growth ETF, which carries a net-expense ratio of 0.95%.
4. Schwab U.S. Dividend Equity ETF
A fourth magnificent ETF that’s a proven moneymaker for patient investors is the Schwab U.S. Dividend Equity ETF (SCHD). This fund sports a healthy 3.64% dividend yield and has delivered a 13.08% annualized return since its inception in October 2011.
The first advantage this fund offers is stated right in its name — “Dividend.” Publicly traded companies that offer a regular dividend are typically profitable, time-tested, and have transparent long-term outlooks. Furthermore, income stocks have historically run circles around publicly traded companies that don’t pay a dividend. This makes dividend stocks an especially smart place to put your money to work during stock market corrections and bear markets.
There’s also plenty of diversification when buying the Schwab U.S. Dividend Equity ETF. As of this past weekend, the fund held 104 securities and was attempting to mirror the total return, including dividends paid, of the Dow Jones U.S. Dividend 100 Index. As of the end of the first quarter, the weighted-average market cap per holding was $149 billion, and the average price-to-earnings ratio of its 104 holdings was below 14. These are inexpensive companies with above-average yields, which (again) is ideal for an uncertain economic environment.
To add to the previous point, the Schwab U.S. Dividend Equity ETF is also less volatile than the benchmark S&P 500. Based on monthly volatility over the past five years, the Schwab U.S. Dividend Equity ETF is only 80% as volatile as the S&P 500. It’s a smart ETF to buy for investors who lack a willingness to deal with volatility.
The cherry on the sundae for the Schwab U.S. Dividend Equity ETF is its ultralow net-expense ratio of 0.06%. The aforementioned 3.64% yield more than offsets what’s nominally lost to fund management fees.
— Sean Williams
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Source: The Motley Fool