The new year is the perfect opportunity to analyze your portfolio and consider loading up on new investments. With the stock market soaring in recent weeks, now could be a smart time to invest if prices continue increasing.
Exchange-traded funds (ETFs) can be a fantastic investment for many people. Each ETF contains dozens or even hundreds of stocks, providing plenty of diversification with much less effort than investing in stocks individually.
However, not all ETFs are good investments. While everyone’s investing preferences will differ, there’s one Vanguard ETF I’ve been buying for years and plan to continue buying as we head into 2024: The Vanguard Growth ETF (VUG).
The perfect balance of risk and reward
Growth ETFs are designed to beat the market, and each fund contains stocks with the potential for above-average growth. The Vanguard Growth ETF includes 221 stocks from a variety of industries, though roughly half of the stocks come from the tech sector.
In general, growth ETFs tend to carry more risk than broad-market funds (such as an S&P 500 ETF). One of the biggest advantages of this fund, though, is that it effectively balances risk and reward.
The ETF’s top 10 holdings make up around half of the fund’s total composition, and these stocks are from behemoth corporations such as Apple, Amazon, and Microsoft. These blue chip stocks may not experience explosive growth, but they are far more stable than many smaller companies — significantly limiting your risk.
The other half of the fund is made up of dozens of smaller stocks with the potential for faster growth. These stocks carry more risk than the blue chips, but if any one of them takes off, you could see substantial returns.
How much can you earn with the Vanguard Growth ETF?
Nobody can say exactly how the market will perform in the short term, and growth ETFs tend to be more volatile than broad-market funds. During tough times, you could see more significant downturns with this ETF than you would with, say, an S&P 500 ETF.
That said, when the market is thriving, growth ETFs often outperform broad-market funds by a substantial margin.
Over the past 10 years, the Vanguard Growth ETF has earned an average rate of return of 13.87% per year. In comparison, the Vanguard S&P 500 ETF (VOO) has earned an 11.77% average annual return over the past 10 years.
While that may not seem like a significant difference, it adds up over time. If you were to invest, say, $200 per month in each of these ETFs, here’s approximately how much you could accumulate over time, depending on whether you’re earning a 13% average annual return with a growth ETF or an 11% average annual return with an S&P 500 ETF.
Again, growth ETFs can be more volatile than broad-market funds, especially in the short term. If you’re a more risk-averse investor and prefer to avoid as much volatility as possible, an S&P 500 ETF or similar investment may be a better fit. You’ll still experience ups and downs with any investment, but broad-market funds often aren’t as extreme in their fluctuations as growth ETFs.
If you’re willing to take on more risk for the chance of earning higher returns, the Vanguard Growth ETF could be a good option. This fund has effectively beaten the market over the past decade, and if it’s able to keep up this trend, you could see significantly higher-than-average earnings over time.
No investment will be the perfect fit for every person, so it’s important to weigh the pros and cons of each ETF before you buy. If you’re looking for a growth ETF that can balance risk and reward, the Vanguard Growth ETF could be a smart buy heading into 2024 and beyond.
— Katie Brockman
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Source: The Motley Fool