3 ETFs to Build Wealth Over the Next Decades

Investors can greatly reduce their risk and build solid wealth over time by investing in multiple exchange-traded funds.

| More on:
exchange traded funds

Image source: Getty Images

New investors who are just starting their investing journey may be overwhelmed by all the information that’s available — especially if you want to explore stock investing. Where should you start? How do you decide which key sectors to invest in, select quality businesses, and read financial statements? As you can see, it can get complicated very quickly.

The good news is that you don’t necessarily need to do all that. A simple way to start building wealth is by buying a basket of stocks via exchange-traded funds (ETFs) that allow for immediate portfolio diversification. ETFs are much easier versus individual stocks to build positions in over time.

Diversify your investments with ETFs

An excellent start would be buying an ETF that provides broad market exposure. In this aspect, SPDR S&P 500 ETF Trust (ASX:SPY) is a better buy than iShares S&P/TSX 60 Index ETF (TSX:XIU). The former is a proxy for the U.S. stock market, while the latter is a proxy for the Canadian stock market.

Currently, SPY’s sector weightings are about 25% technology, 14% healthcare, 14% real estate, 14% financial services, 10% consumer discretionary, 8% communication services, 7% consumer staples, 5% energy, 3% in utilities, and 2.5% in basic materials.

Compare that to XIU’s sector weightings: 35% in financial services, 35% in real estate, 18% in energy, 11% in industrials, 10% in basic materials, 7% in technology, 6% in communication services, 5% in consumer discretionary, 3% in utilities, 3% in consumer staples, and 0% in healthcare.

Of course, there’s nothing stopping you from buying multiple ETFs or even complementing your ETF portfolio with individual stock positions once you’ve learned enough and feel comfortable dabbling in.

For now, we’ll continue with the ETF discussion.

Building wealth

Since small companies grow faster than large companies (if the former group survive and thrive), you could potentially build wealth faster by investing in small-cap ETFs like Vanguard Small-Cap Growth ETF (NYSEMKT:VBK).

Small-cap stocks have underlying businesses that have a bigger chance of going bankrupt than large companies. Consequently, if you invest in individual small-cap stocks, you have a higher chance of losing your entire investment if not a massive chunk of it compared to investing in large caps.

So, it’s much safer to diversify your risk across a basket of small-cap stocks (such as via small-cap ETFs) to aim for higher long-term growth. Currently, VBK has about 695 holdings. Its top four sectors have the following weightings: 20.5% in healthcare, 19.0% in industrials, 18.9% in technology, and 15.7% in consumer discretionary.

The Foolish investor takeaway

In the long run, the stock market has gone up and created wealth for its investors. Additionally, the stock market has historically beat other asset classes. However, buying individual stocks is a lot of work and can lead to concentration risk, especially when you initially start your portfolio.

To create solid wealth over time, you can invest in ETFs like SPY. There are bond ETFs as well for greater diversification. In any case, it’s easy to build positions when you buy a few ETFs that create a diversified portfolio. If you take care to buy more units during bear markets, your wealth should increase at a good clip over time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng has a position in Vanguard Small-Cap Growth ETF. The Motley Fool recommends Vanguard Index Funds - Vanguard Small-Cap Growth ETF. The Motley Fool has a disclosure policy.

More on Investing

analyze data
Dividend Stocks

How Much Do You Need to Invest to Give Up Work and Live Only Off Dividend Income?

Here's an honest assessment of how difficult it is to achieve "quit-your-job" levels of passive income.

Read more »

Man holding magnifying glass over a document
Stocks for Beginners

TFSA Investors: Make Your Recession Watchlist Now!

These long-term stocks offer immense value for TFSA investors looking to create immense returns coming out of a recession.

Read more »

Profit dial turned up to maximum
Dividend Stocks

2 TSX Dividend Stocks With Seriously Huge Payouts

The TSX telecom sector has some great high-yielding companies up for grabs.

Read more »

TFSA and coins
Dividend Stocks

Dividend Stocks With Yields TFSA Investors Should Lock In Now!

Are you looking to build a passive-income stream? Here are two top dividend stocks to load up on in your…

Read more »

Gas pipelines
Energy Stocks

Better Energy Stock to Buy: Suncor or Canadian Natural Resources?

Suncor and Canadian Natural Resources are off their recent highs. Are these stocks now good to buy?

Read more »

tsx today
Stocks for Beginners

TSX Today: What to Watch for in Stocks on Thursday, March 23

TSX stocks may remain volatile, as investors continue to assess how the high interest rate environment could affect the economy…

Read more »

A plant grows from coins.
Dividend Stocks

2 Young TSX Stocks You’ll Be Glad You Bought in 10 Years

Youth means nothing when you plan to hold strong companies long term. These two TSX stocks should therefore be first…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

Is it a Trap? 3 TSX Stocks With Ultra-High Dividend Yields 

Who doesn’t love dividends? But the high-interest rate environment makes ultra-high dividends unsustainable. Are these stocks a value trap?

Read more »