U.S. equity investors have been rewarded mightily over the past 20 years.
In the past decade, the S&P 500 (SNPINDEX: ^GSPC) has generated an average annual total return of 15.7%. You might be less impressed by the index’s 20-year average annual total return of around 11.2%, but keep in mind that this period began right before the start of the financial crisis that resulted in a nearly 60% drawdown.
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If you’re a long-term investor, the most important takeaway is that the S&P 500 has historically never had a negative return over a 20-year time frame. That doesn’t mean it couldn’t happen in the future. But over the long run, the good tends to far outweigh the bad.
If you’re looking at what to invest in and hold onto for the next 20 years, here are five exchange-traded funds (ETFs) that look especially promising.
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Start by investing in the entire U.S. stock market
The best long-term investing strategy might simply be not to overthink it. Don’t try to find the next big home runs or overtrade your account. Just buy the entire U.S. stock market and let U.S. economic growth do its thing.
My core equity ETF of choice is the Vanguard Total Stock Market ETF (NYSEMKT: VTI). While the Vanguard S&P 500 ETF (NYSEMKT: VOO) provides exposure to U.S. large-cap stocks, the Vanguard Total Stock Market ETF targets the entire investable U.S. market, roughly 3,500 stocks in all. Adding small caps to the core of your portfolio can increase returns, even though large caps have dominated lately.
Targeting tomorrow’s leaders
Even though the S&P 500 gets most of the attention, mid-caps have a pretty strong historical risk/return profile themselves. This is the group that’s graduated beyond some of the small-cap volatility but maintains the ability to leap into the large-cap leader group of the future.
The Invesco S&P MidCap Quality ETF (NYSEMKT: XMHQ) aims to capture the potential of mid caps, but it does so smartly. It focuses on high-quality stocks within this group by looking for companies with high returns on equity (ROE) and lower financial leverage. This helps mitigate some of the risk that can come with investing in more speculative companies.
Own small companies that are already profitable
The same principle applies when investing in U.S. small caps. Many companies in this segment remain unprofitable, which can raise red flags about downside risk. The iShares Core S&P Small-Cap ETF (NYSEMKT: IJR) helps solve that problem.
This fund tracks the S&P SmallCap 600 index, which has a built-in profitability screen that companies must pass in order to qualify. While a Russell 2000 fund would include everything in this space, this ETF would target only the higher-quality companies. Many companies are smaller for a reason. The iShares Core S&P Small-Cap ETF ensures that you’re investing in the more financially viable ones.
Don’t assume the U.S. will always lead
U.S. and international stocks often trade global leadership in multiyear cycles. The S&P 500 has led the world for the better part of the past 15 years, and international stocks could be overdue for their time.
The Vanguard Total International Stock ETF (NASDAQ: VXUS) is essentially the Vanguard Total Stock Market ETF equivalent for non-U.S. stocks. With roughly 8,800 stocks in all and carrying an expense ratio of just 0.05%, it’s perhaps the cheapest and most diverse way to invest overseas.
Turning dividends into long-term wealth
In the midst of the current artificial intelligence (AI) boom, it’s easy to forget the benefits of investing in high-quality, dividend-paying stocks. Their returns may pale in comparison to those of the megacap tech stocks over the past decade, but their focus on financial health and strong cash flows makes them ideal long-term holdings.
The Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) invests in U.S. large-cap stocks with at least 10 consecutive years of annual dividend growth. Investing in dividend stocks provides a steady income stream to go along with their capital growth potential, which can be used to buy additional shares at regular intervals. They may seem boring, but they have a long history of solid performance.
Should you buy stock in Vanguard Dividend Appreciation ETF right now?
Before you buy stock in Vanguard Dividend Appreciation ETF, consider this:
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David Dierking has positions in Vanguard Dividend Appreciation ETF, Vanguard Morningstar Total Stock Market ETF, and Vanguard Total International Stock ETF. The Motley Fool has positions in and recommends Vanguard Dividend Appreciation ETF, Vanguard S&P 500 ETF, and iShares Core S&P Small-Cap ETF. The Motley Fool has a disclosure policy.
