These Vanguard ETFs are all you need to achieve financial security.
Despite the occasional dips, the stock market is overall the best way to build wealth. Investing just a few hundred dollars a month can make anyone a millionaire over their working career. And these two ETFs are all you need to do it.
Keep it simple and beat the pros
The S&P 500 index has advanced from 45 to 5,460 since 1957. The Vanguard S&P 500 ETF (VOO 1.58%) is all you need to jump on this wealth-creating engine. It is set up to track the performance of the index, which provides diversification across the best companies in the world. In fact, the top 10 holdings in the ETF are technological innovators that could benefit substantially in the years to come from artificial intelligence (AI) initiatives.
The S&P 500 only includes U.S. companies that have ample market liquidity and a market capitalization of at least $18 billion. Importantly, companies must have reported positive earnings in the most recent quarter, and the sum of the last four quarters.
It’s simple and highly effective. The S&P 500 index beat the return of 93% of active large-cap fund managers over the last 20 years through 2023. Here are the current top 10 holdings of the Vanguard S&P 500 ETF and their percentage weighting as of June 30, 2024:
- Microsoft (7.23%)
- Nvidia (6.61%)
- Apple (6.60%)
- Amazon (3.85%
- Meta Platforms (2.40%)
- Alphabet Class A (2.33%)
- Alphabet Class C (1.95%)
- Berkshire Hathaway Class B (1.60%)
- Eli Lilly (1.57%)
- Broadcom (1.52%)
The Vanguard S&P 500 ETF has delivered an annualized return of 14.5% since 2010. It’s worth noting this return is above the historical average. With dividends reinvested, the S&P 500 index has delivered an annualized return of 10.5% since 1957.
It’s probably wise to assume there will be a reversion to the mean at some point. But even an investor who invests $200 per month could achieve $1 million in 45 years at an annual return of just 8%. At 10%, it would take 38 years, and at 12%, 33 years.
The Vanguard S&P 500 ETF also has a very low expense ratio of just 0.03%. This amounts to just $0.30 for every $1,000 invested, and it requires a minimum investment of just $1.
For investors who want dividend growth
Earning passive income from your investments can help ease anxiety when the markets inevitably dip. Market dips of 10% or more happen every two years, on average. Over the last century, there have been 14 bear markets, which is a pullback of 20% or more from the most recent market peak, with four of them occurring since 2000.
The S&P 500 dividend yield is at a 20-year low of 1.34%, but investors can boost their yield while still gaining exposure to many of the same stocks in the S&P 500 with the Vanguard Dividend Appreciation ETF (VIG 0.82%). This ETF’s trailing dividend yield is 1.79%.
The Dividend Appreciation ETF seeks to track the performance of the S&P U.S. Dividend Growers index and currently holds 339 stocks. The index focuses on companies that have a record of increasing their dividend for at least 10 years, and it excludes real estate investment trusts (REITs). The exchange-traded fund (ETF) delivered an annualized total return of 9.57% (including dividend reinvestment) since 2006.
Here are the top 10 holdings as of June 30, 2024 and their forward dividend yields:
- Apple (0.46%)
- Microsoft (0.72%)
- Broadcom (1.40%)
- JPMorgan Chase (2.20%)
- ExxonMobil (3.25%)
- UnitedHealth Group (1.50%)
- Visa (0.82%)
- Procter & Gamble (2.41%)
- Costco Wholesale (0.56%)
- Mastercard (0.61%)
The focus on dividend growth means this ETF is less sensitive to rising interest rates, which can pressure the performance of stocks with high yields. Over the last five years, the companies in the ETF grew their earnings 12% per year, which drove similar returns over that period for the ETF’s shareholders.
The expense ratio is also very low at 0.06% — double the Vanguard S&P 500 ETF but still irrelevant to your potential gains. Both ETFs require a minimum investment of only $1, making it affordable for any investor to get started.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Ballard has positions in Meta Platforms and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, Costco Wholesale, JPMorgan Chase, Mastercard, Meta Platforms, Microsoft, Nvidia, Vanguard S&P 500 ETF, Vanguard Specialized Funds-Vanguard Dividend Appreciation ETF, and Visa. The Motley Fool recommends Broadcom and UnitedHealth Group and recommends the following options: long January 2025 $370 calls on Mastercard, long January 2026 $395 calls on Microsoft, short January 2025 $380 calls on Mastercard, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.