A big hurdle to getting your investment plan off the ground is figuring out where to start. You may have some high-profile stocks in mind, such as Apple or Walmart. But concentrating all your money on one or two stocks is not a good idea.
Fortunately, a quality ETF or mutual fund can give you the best of both worlds. The right funds hold those high-profile stocks you like, plus hundreds of other positions too. You’ll get the long-term growth you want, along with diversification — all packed into every stock.
Here are three types of funds that can anchor your investment strategy and provide long-term returns. Over 20 years or more, you can expect these funds to grow by an average of about 7% per year, excluding inflation.
1. S&P 500 index ETF
The S&P 500 fund is a popular choice for new investors, and for good reason. The S&P 500 Index includes 500 of the largest and most successful public companies in the U.S. By value, the index makes up approximately 80% of all stocks — which is why the index is often used as a gauge for the overall market.
S&P 500 ETFs track the performance of the index. There are many S&P 500 funds out there, but the best picks are those with low expense ratios and minimal tracking error.
- Expense report is the percentage of your investment that pays for the fund’s operating costs.
- Tracking error is the difference between the fund’s performance and the index’s performance. There is always a slight discrepancy here. Funds have issues with expenses and timing, while indexes do not. A fund’s expense ratio usually accounts for most of the tracking error.
The table below shows three popular S&P 500 index funds, along with their expense ratios, size and 10-year growth performance.
|
Name of the Fund |
Expense report |
Net assets |
10-year average annual growth |
|---|---|---|---|
|
Vanguard S&P 500 ETFs (FLIGHT -3.43%) |
0.03% |
780 billion dollars |
13.76% |
|
SPDR S&P 500 ETF (SPY -3.38%) |
0.09% |
373 billion dollars |
13.65% |
|
iShares Core S&P 500 ETF (IVV -3.42%) |
0.03% |
309 billion dollars |
13.75% |
Table data source: Vanguard, SPDR, iShares
2. Total market fund
Another strong option is a total market fund, which replicates the performance of — you guessed it — the entire stock market.
Total market funds vary more in their holdings than S&P 500 funds, for several reasons. First, total market funds can track various indices, such as Wilshire 5000 or Russell 3000. These funds may also track their entire benchmark index or take a sampling approach.
Sampling means that the fund holds a smaller representative group of stocks that reflects the performance of an index. The advantage is that sampling can be more cost-effective compared to owning every stock in a large index. As with the S&P 500 ETF, lower expenses are better.
Even a total market fund that samples will provide diversification across thousands of stocks, including small, medium and large companies.
See the table below for three total market funds with low expense ratios.
|
Name of the Fund |
Expense report |
Total net assets |
10-year average annual growth |
|---|---|---|---|
|
Vanguard Total Market Index Fund (VTI -3.31%) |
0.03% |
1.2 trillion dollars |
13.42% |
|
iShares Core S&P Total US Stock ETF (THIS -3.37%) |
0.03% |
43 billion dollars |
12.50% |
| Schwab Broad US Market ETF (SCHB -3.38%) |
0.03% |
21 billion dollars |
13.39% |
Table data source: Vanguard, Schwab, Fidelity
3. Quality Controlled Dividend Fund
If you don’t like the idea of waiting decades to cash in on your investment returns, a dividend fund may be a better choice. To be clear, you’ll get richer faster if you reinvest those dividends. But quarterly payments, even if reinvested, can feel more tangible than unrealized gains. And tangible returns are comforting — especially in bear markets.
Quality Controlled Dividend Funds invest in companies that pay dividends that meet thresholds for stability and reliability. The fund may track a quality dividend index, such as the Northern Trust Quality Dividend Index. Or the fund may have its own screening methodology that looks at dividend payout ratio and dividend sustainability, among other things.
The table below shows three controlled dividend funds that may have roles to play in your portfolio.
|
Name of the Fund |
Expense report |
Total net assets |
Dividend yield |
|---|---|---|---|
|
Schwab US Dividend Equity ETF (SCHD -2.94%)
|
0.06% |
38 billion dollars |
3.3% |
|
FlexShares Quality Dividend Index Fund (QDF -3.09%) |
0.38% |
1.6 billion dollars |
2.3% |
|
Franklin US Low Volatility High Dividend Index ETF (LVHD -2.11%)
|
0.27% |
686 million dollars |
3.4% |
Table Data Source: Schwab, FlexShares, Franklin Templeton
Get rich with broad-based funds
These funds won’t make you rich overnight, but you can double your invested capital about every 10 years. Repeat this process four times and you will be richer than when you started.
Catherine Brock has positions in the Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends the Vanguard S&P 500 ETF and the Vanguard Total Stock Market ETF. The Motley Fool has a disclosure policy.