Long-term ETFs offer diversification via a hands-off strategy.
A lot of research shows that active management, which sometimes means trading in and out of positions in a fund frequently, can often underperform. Specifically, two recent reports from Morningstar and S&P Global show that in one of the most volatile periods on record, less than half of active funds outperformed their passive counterparts in the 12 months between June 2020 and June 2021. So why not take a more long-term approach to the markets instead of giving yourself the added expense or stress that’s associated with changing horses midstream? If you want to think in terms of years or decades instead of days or months, these seven long-term ETFs offer a lot of potential.
iShares Core S&P 500 ETF (ticker: IVV)
While the SPDR S&P 500 ETF (SPY) is by far the largest and most liquid of options out there among index funds benchmarked to the S&P 500, this iShares fund is worthy of mentioning for one simple fact alone: It charges just 0.03% in annual fees versus 0.095% for SPY. Granted, the difference boils down to $3 a year via the iShares offering versus $9.50 if you have $10,000 invested, but why pay more than you have to? The bottom line is they hold the same lineup of 500 of the largest corporations in America. So if you’re just looking for cheap and diversified exposure to the market, IVV is it.
Invesco QQQ ETF (QQQ)
A bit different flavor of index fund, QQQ is the largest ETF offered by Invesco and one that’s similar to IVV in that it tracks a passive index of stocks. The key difference, however, is this fund is benchmarked to the Nasdaq-100 — meaning you’re only getting the top 100 nonfinancial firms listed on the Nasdaq exchange. The good news is that group includes most major companies investors think of first these days — including the three largest companies on the planet at present, trillion-dollar tech giants Apple Inc. (AAPL), Microsoft Corp. (MSFT) and Google parent Alphabet Inc. (GOOG, GOOGL). There are risks with this approach, of course, as you get a greater bias toward tech than other indexes. But considering the long-term outperformance of this sector in general and these big names in particular, that may be more of an appeal than a detriment for some buy-and-hold investors. QQQ has a 0.2% expense ratio.
Vanguard Russell 2000 ETF (VTWO)
This Vanguard fund is benchmarked to a much deeper list of stocks, as well as companies that are generally much smaller. As the name implies, VTWO is tied to the Russell 2000 index — a list of stocks that is formed after you rank the top 3,000 U.S. companies and then exclude the 1,000 largest from the list. Smaller stocks can admittedly have more risk since they don’t have the deep pockets that megacap blue-chip stocks have. But these stocks sometimes offer more long-term upside than established players as they are in the beginning stages of growth. Exemplary holdings include theater operator AMC Entertainment Holdings Inc. (AMC), rental car company Avis Budget Group Inc. (CAR) and midsize chipmaker Lattice Semiconductor Corp. (LSCC). VTWO has a 0.1% expense ratio.
Schwab US Dividend Equity ETF (SCHD)
Another important long-term ETF to consider is this income-oriented fund from Schwab. If you’re measuring your portfolio’s performance in decades instead of just a few months, dividends should be part of your strategy, as they can add up in the long run. With a current dividend yield of nearly 3%, compared with the one-year average dividend yield of 1.3% for the S&P 500, this ETF is a great way to achieve that strategy. Structurally it’s very attractive, with a low annual expense ratio of 0.06% and a well-diversified portfolio with more than 100 positions and no single stock taking up more than about 4% of holdings. Over the long haul, this fund will give you great exposure to the stock market along with great income potential via dividends.
iShares ESG Aware MSCI USA ETF (ESGU)
Increasingly, many investors are putting their money behind their principles with an eye toward so-called ESG investing, which places emphasis on environmental, social and governance issues. But more importantly, recent Wall Street trends have shown that these kinds of strategies are capable of performing as well as traditional strategies — and in some circumstances, even better. This $25 billion ESG-aware ETF from iShares is a great way to tap into this trend, with a simple screening system that excludes fossil fuel companies, firearm manufacturers and firms that lag far behind their peers when it comes to diverse board representation. The fund is structurally sound, too, with a low expense ratio of just 0.15% and a diversified portfolio of about 320 prominent U.S. stocks. If you care about long-term social and environmental trends, either because of your principles or because of the potential for outperformance, ESGU is worth a look.
Vanguard Total International Stock ETF (VXUS)
Thus far, all of the aforementioned long-term ETF holdings on this list have focused on U.S. equity markets. And while domestic stocks are certainly important, it’s equally important for investors to consider geographic diversification if they are in it for the long haul. That’s where VXUS comes in. The $400 billion fund is one of the largest ETFs of any kind on Wall Street, and is one of the simplest and most liquid ways to get international exposure for your portfolio. With an “ex-U.S.” strategy, this ETF holds a massive lineup of 7,800 stocks in just about every corner of the world except the U.S. That means top multinationals such as Swiss consumer giant Nestle SA (NSRGY) and Japanese carmaker Toyota Motor Corp. (TM) join smaller emerging market plays in China and Brazil. This is a one-stop fund for global exposure and could be an important holding for investors looking to expand their portfolios beyond the U.S. VXUS has a 0.08% expense ratio.
Vanguard Long-Term Corporate Bond ETF (VCLT)
Last but not least, this Vanguard fund looks beyond the stock-focused ETFs found on this list and into fixed-income markets to provide exposure to corporate bonds. This is an important factor for many investors, either because they are concerned about income potential over the long term or they are looking for diversification. Specifically, VCLT invests in long-dated corporate bonds, with a focus on only investment-grade bonds from well-capitalized companies. This splits the difference between risky junk bonds from troubled corporations and rock-solid but comparatively lower-yielding U.S. Treasury bonds. As a result, the current yield is about 3.2%. That makes VCLT a good foundational investment for those who want exposure to the bond market as part of their long-term strategies. VCLT has a 0.04% expense ratio.
Seven of the best long-term ETFs to buy and hold:
— iShares Core S&P 500 ETF (IVV)
— Invesco QQQ ETF (QQQ)
— Vanguard Russell 2000 ETF (VTWO)
— Schwab US Dividend Equity ETF (SCHD)
— iShares ESG Aware MSCI USA ETF (ESGU)
— Vanguard Total International Stock ETF (VXUS)
— Vanguard Long-Term Corporate Bond ETF (VCLT)