Exchange-traded funds (ETFs) can be a smart option for many investors. They're low-maintenance investments that require little effort, yet by investing consistently, you may be able to accumulate a significant amount of money over time.
Choosing the right ETFs is critical, however, because some are more dangerous than others. Some funds earn substantial returns but also carry a lot of risk. Others may be safer, but they earn dismal returns each year.
Balancing risk and reward can be challenging, but there are three Vanguard ETFs, in particular, that I plan to stock up on as we head into 2022.
1. Vanguard S&P 500 ETF (VOO)
It's hard to go wrong with an S&P 500 ETF, and the Vanguard S&P 500 ETF (NYSEMKT: VOO) is a strong option. This fund tracks the S&P 500 index, meaning it includes the same stocks as the index itself and aims to mirror its performance over time.
This ETF is a great choice for those who want to limit their risk while maximizing their potential long-term earnings. The S&P 500 itself experiences short-term volatility, but it has a very strong track record when it comes to recovering from downturns. By investing in this ETF, your portfolio may take a hit in the short term if the market is rocky. But over the long run, you're almost guaranteed to see positive average returns.
Historically, the S&P 500 itself has earned an average rate of return of around 10% per year. Your actual returns each year will likely be higher or lower than 10%, but over time, those annual returns should average out to roughly 10% per year.
While a 10% average annual return may not sound like much, it adds up over time. Say, for example, you're investing $200 per month in this ETF while earning an average 10% annual return. After 25 years, you'll have accumulated around $236,000. After 40 years, you'd have roughly $1.062 million.
2. Vanguard Total Stock Market ETF (VTI)
The Vanguard Total Stock Market ETF (NYSEMKT: VTI) aims to follow the performance of the stock market as a whole. This fund contains 4,156 stocks from small, midsize, and large corporations across a variety of industries. For comparison, the S&P 500 ETF includes around 500 stocks from only large companies.
In general, the more diverse a fund is, the lower your risk. This ETF, then, can be a smart option for those who want to invest in stocks while limiting as much risk as possible. When you invest in a broad range of stocks, you're more protected against market volatility.
Again, the stock market as a whole will still experience ups and downs in the short term. But history has proven that the market can rebound from even the worst crashes, so even if it does take a turn for the worse, it's very likely this ETF will bounce back.
Since its inception in 2001, this fund has earned an average rate of return of just under 9% per year. While that's slightly lower than the S&P 500 ETF, keep in mind that lower risk levels sometimes also result in lower average returns. Whether that's a worthwhile trade-off will depend on your personal preferences.
3. Vanguard Growth ETF (VUG)
The Vanguard Growth ETF (NYSEMKT: VUG) is higher risk than the other two ETFs here, but it also has the most earning potential.
This ETF only includes stocks that have the potential for faster-than-average growth, so you're more likely to earn higher average returns than you would with an S&P 500 or Total Stock Market ETF. In fact, since it was launched in 2004, the Vanguard Growth ETF has earned an average return of close to 12% per year.
Keep in mind, however, that this fund can be higher risk, simply because it only contains growth stocks. These stocks tend to see higher average returns, but they can also be more volatile than more established, slower-growing stocks.
If you choose to invest in this ETF, it's wise to make sure the rest of your portfolio is well-diversified. You may even invest in this ETF as well as, say, the S&P 500 ETF to create more balance in your portfolio. This way, even if the Growth ETF experiences volatility, your overall portfolio should remain relatively stable.
Investing in ETFs can be a fantastic way to build wealth over the long term, but it's important to choose your investments wisely. While everyone's situation is different, these three ETFs are some of the strongest in my portfolio, and I plan to continue investing throughout 2022 and beyond.
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Katie Brockman owns Vanguard Growth ETF, Vanguard S&P 500 ETF, and Vanguard Total Stock Market ETF. The Motley Fool owns and recommends Vanguard Growth ETF, Vanguard S&P 500 ETF, and Vanguard Total Stock Market ETF. The Motley Fool has a disclosure policy.