One of my favorite ways to invest is through exchange-traded funds (ETFs). They’re simple, and you can generally accomplish the same goals in a few investments that would’ve taken you dozens or hundreds of investments a few decades ago.
Today, thousands of ETFs are on the stock market, covering virtually every sector, asset class, and investment strategy possible. However, not all ETFs are alike.
If you have $500 to invest and are looking for two investments you can buy and hold on to forever, the two Vanguard ETFs discussed here are good go-tos. They’ll expose you to the broader U.S. economy, as well as companies operating abroad. It’s a way to cover lots of ground with only two investments.
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1. Vanguard S&P 500 ETF
If I were forced to make only one investment from now until the end of time, it would be in the Vanguard S&P 500 ETF (VOO -0.01%). It’s currently my largest holding and will likely remain so.
This ETF mirrors the S&P 500, which tracks the 500 largest U.S. companies on the stock market. Although many businesses operate in the U.S., the broader economy is undoubtedly driven by the S&P 500 companies. That’s why many consider an investment in the S&P 500 to be an investment in the U.S. economy.
The beauty of this ETF is that you’re exposed to leaders in all major sectors of the economy. The ETF is more tech-leaning than in previous years because of skyrocketing tech valuations, but it still covers its bases across the economy:
- Information Technology: 31.7%
- Financials: 13.3%
- Health Care: 11.2%
- Consumer Discretionary: 10%
- Communication Services: 9.1%
- Industrials: 8.5%
- Consumer Staples: 5.8%
- Energy: 3.4%
- Utilities: 2.5%
- Real Estate: 2.3%
- Materials: 2.2%
I’m not the only advocate for the S&P 500, either. Famed investor Warren Buffett has been one of its biggest cheerleaders for decades, saying: “In my view, for most people, the best thing to do is to own the S&P 500…” This makes sense, too, when you consider its historical performance.
VOO data by YCharts.
Past performance doesn’t guarantee future performance, but even if this ETF averaged around 10% annual returns (closer to the S&P 500’s long-term average), relatively small investments over time could go a long way toward building a respectable portfolio. From the $500 available to invest in our scenario, I’d put $400 into this ETF.
2. Vanguard Total International Stock ETF
Part of building a well-diversified portfolio is ensuring that your investments aren’t all in U.S. companies. Sure, the U.S. economy has been the gold standard for a while, and American businesses make up 17 of the 20 most valuable public companies in the world (by market cap).
However, you don’t want your portfolio completely tied to one country’s economic growth while you ignore international growth opportunities. That’s why it’s recommended you have some exposure to international companies, which the Vanguard Total International Stock ETF (VXUS -0.24%) provides. This ETF covers the full range of international companies, with representation from both developed and emerging markets.
With developed markets, you often get more mature financial markets, better infrastructure, and more stable politics (relatively speaking). Think the U.K., Japan, Canada, and Australia. Emerging markets have less mature markets and developing infrastructure, but they’re headed in the right direction. Think Mexico, Brazil, South Africa, and China. Below is how this ETF is broken down by market:
| Market | Percentage of the ETF |
|---|---|
| Europe | 38.8% |
| Emerging Market | 27.5% |
| Pacific | 25.7% |
| North America | 7.5% |
| Middle East | 0.5% |
Data source: Vanguard. Percentages as of Oct. 31.
Investing in both developed and emerging markets is helpful because they offer different benefits. Developed markets tend to be more stable and less prone to volatility. Emerging markets can be a bit more unpredictable, but they generally offer more growth opportunities as their economies and infrastructure continue to expand and develop.
There’s no set percentage of your portfolio that should be international companies, but I personally try to keep around 10% of my portfolio in international stocks.
I prefer to put the bulk of my investments in U.S. companies, but around 10% is just enough of a hedge for my personal preference. That said, you could feel comfortable investing the remaining $100 of your $500 into this ETF.
Stefon Walters has positions in Vanguard S&P 500 ETF and Vanguard Total International Stock ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF and Vanguard Total International Stock ETF. The Motley Fool has a disclosure policy.
