For most investors, passive investing using exchange-trade funds (ETFs), especially those that track broad market stock indexes, is the way to go. There is tons of evidence out there that holding a low-cost, globally diversified stock portfolio will beat the majority of stock pickers.
The key here is to keep your investment portfolio low cost and diversified. While stock picking can be fun, it is also time consuming, stressful, and prone to underperformance, especially during bear markets. For a long-term, buy-and-hold mentality, using ETFs is an excellent way to invest for retirement.
Today, I’ll be reviewing two great, low-cost index ETFs from Vanguard that investors can use as the core of their portfolios.
Vanguard S&P 500 Index ETF
A high-risk, high-reward index favoured by many investors is the S&P 500. This index is comprised of 500 large-cap U.S. equities and is regarded as a benchmark for U.S. stock market performance by retail and institutional investors alike.
Investors bullish on the U.S. stock market can buy Vanguard S&P 500 Index ETF (TSX:VFV). VFV is the top Canadian ETF for tracking the S&P 500, with $6.5 billion in assets under management (AUM) and a high volume traded daily. The ETF is also very cheap, with a management expense ratio (MER) of 0.08%, or $8 in annual fees for a $10,000 investment.
VFV is not currency hedged, so changes in the CAD-USD exchange rate will add volatility to its daily price movements. If the USD appreciates vs. the CAD, VFV will gain additional value and vice versa if the CAD appreciates vs. the USD. Keep this in mind before you buy.
Vanguard All-Equity ETF
The S&P 500 is a great investment, but some international diversification is good. Holding the stocks of Canada, developed, and emerging markets can offset the chance of the U.S. stock market performing poorly for an extended period of time, like with the “lost decade” of 2002-2009.
Vanguard All-Equity ETF Portfolio (TSX:VEQT) is possibly one of the best worldwide equity ETFs available to Canadian investors, granting instant exposure to over 13,526 stocks covering U.S., Canadian, developed, and emerging markets.
With VEQT, you never have to try and determine which stocks will do well, which market cap size will gain more, which sector will outperform, or which country will pull ahead. For an MER of 0.24%, you gain a complete stock portfolio and don’t have to worry about re-balancing it.
The Foolish takeaway
Both VFV and VEQT are fantastic choices for young investors with a high risk tolerance and aggressive growth objectives. Because both ETFs are 100% stocks, investors should only buy them if they can withstand high volatility and fluctuations in their portfolio value. These ETFs are appropriate for long-term investors who can consistently make contributions and stay the course.