Key Points
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The S&P 500 and Russell 2000 are the primary indexes for large-cap and small-cap stocks, respectively.
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Mid-cap stocks are seen as the sweet spot between stability and growth opportunities.
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The Vanguard Total International Stock ETF is an underrated dividend payer.
Putting together a well-rounded stock portfolio should be the goal for the everyday investor. You may want a few to do the heavy lifting, but you should also want stocks that complement each other. Luckily, a well-rounded, complementary portfolio can be accomplished with a few ETFs that cover a lot of ground.
Instead of individually investing in dozens, hundreds, or however many stocks, you can invest in these four Vanguard ETFs and instantly get exposure to thousands of companies at once. You’ll have blue-chip giants, leaders in niche markets, up-and-comers, and companies from across the world.
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Three wooden blocks spelling “ETF” on an open laptop.
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1. Vanguard S&P 500 ETF
Investing in an S&P 500 ETF is one of the most effective ways to benefit from growth in the U.S. economy. Granted, the S&P 500 comprises only around 500 of the largest U.S. companies, but these companies play a significant role in shaping the economy’s direction.
The Vanguard S&P 500 ETF (NYSEMKT: VOO) is a cheap way to invest in the S&P 500, with an expense ratio of only 0.03%. For $0.30 per $1,000 invested, you’re getting exposure to top companies from every sector of the economy. There are tech heavyweights, retail giants, financial titans, the backbones of the nation’s healthcare system, and more.
If I were crafting a portfolio of these four ETFs, VOO would be the largest holding by a long shot. It’s a set-it-and-forget-it type of investment that has stood the test of time.
Since the start of 1996, the S&P 500 has averaged around 10.5% annual total returns. Since VOO was created in September 2010, it has averaged nearly 15% annual total returns. Past performance doesn’t guarantee future performance, but with the S&P 500 indirectly tied to the U.S. economy, it’s one of the best places to put your money to grow over time.
2. Vanguard Mid-Cap ETF
Mid-cap stocks can often fly under the radar because they’re not typically as dominant as larger companies (like those in the S&P 500) or as new and flashy as some younger emerging companies. Still, mid-cap stocks are in that sweet spot between stability and growth potential. Large enough to have found its place in the market, but small enough to still have plenty of growth opportunities in front of it if it chooses.
The Vanguard Mid-Cap ETF (NYSEMKT: VO) gives you exposure to 289 mid-cap stocks across every major sector:
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Industrials: 20.7% of the ETF
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Consumer Discretionary: 13.6%
VO is more diversified than the S&P 500 and Nasdaq Composite, which makes it much less reliant on the tech sector than they are.
3. Vanguard Russell 2000 ETF
The Russell 2000 is to small-cap stocks what the S&P 500 is to large-cap stocks. It tracks the 2,000 smallest companies in the Russell 3000 and, in my opinion, is the best way to invest in small-cap stocks.
Because of their size, small-cap stocks are generally more sensitive to broader economic conditions and more volatile, so investing in a broad small-cap ETF like the Vanguard Russell 2000 ETF (NASDAQ: VTWO) is a way to take advantage of their potential, while hedging some of the extra risks that come with that.
Most of VTWO’s top holdings come from the industrial and tech sectors, and those in the tech sector mostly deal with semiconductors, manufacturing, and other hardware. So, while younger software start-ups get a lot of attention, many small-cap stocks are actually companies dealing with the infrastructure of it all.
Small-cap stocks typically outperform the market at the beginning of an economic recovery, but VTWO has been a good long-term hold. Since it hit the market in Sept. 2010, it has averaged around 11.2% annual total returns.
4. Vanguard Total International Stock ETF
To top off a complementary portfolio, it helps to include international stocks to hedge against the other U.S.-dominant indexes and ETFs. One of the best parts of the appropriately named Vanguard Total International Stock ETF (NASDAQ: VXUS) is that it includes almost all non-American stocks currently trading on the market. One investment, 8,770 stocks.
With VXUS, you get the best of both worlds: stocks from developed markets that are typically more stable, as well as stocks from emerging markets that may be more volatile, but often come with more growth opportunities. The U.S. economy is a great long-term bet, but it undoubtedly has its down periods. A broad ETF like VXUS is a way to hedge against that and ensure your returns aren’t totally dependent on the U.S.
Diversification aside, VXUS’s dividend makes it worth holding. It has averaged a 2.9% yield over the past decade, which is beyond impressive for such a broad ETF.
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Stefon Walters has positions in Vanguard Mid-Cap ETF, Vanguard S&P 500 ETF, and Vanguard Total International Stock ETF. The Motley Fool has positions in and recommends Vanguard Mid-Cap ETF and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.