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The new year is the perfect opportunity to reevaluate your portfolio and stock up on new investments. Whether you’re just starting out in the stock market or you’ve been investing for years, exchange-traded funds (ETFs) can be a fantastic option.
When you invest in an ETF, you’re buying hundreds or even thousands of stocks at once. This instantly diversifies your portfolio, limiting your risk.
However, not all ETFs are created equal, and some are stronger investments than others. As we head into 2022, there are a few funds that could be a smart addition to your portfolio.
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1. Vanguard S&P 500 ETF
The Vanguard S&P 500 ETF (NYSEMKT: VOO) is one of the strongest and most stable ETFs out there. It tracks the S&P 500 index itself, which means it includes the same stocks and aims to mirror its performance.
S&P 500 ETFs are fantastic long-term investments, as the index itself has a long history of earning positive average returns. While it is subject to short-term volatility, historically, it’s earned an average rate of return of around 10% per year.
If you were to invest, say, $300 per month while earning a 10% average annual rate of return, you’d have close to $600,000 saved after 30 years.
In addition, the S&P 500 only includes stocks from the largest and strongest corporations in the U.S. Some of the largest holdings include behemoth companies like Amazon, Apple, and Tesla, for example. These organizations are more likely to survive any potential volatility and continue growing, and by investing in the Vanguard S&P 500 ETF, you’re gaining exposure to hundreds of these solid stocks.
2. iShares Russell Top 200 Growth ETF
The iShares Russell Top 200 Growth ETF (NYSEMKT: IWY) includes 110 stocks from large corporations that are expected to see above-average growth.
Growth ETFs can be a smart option for those who want to potentially earn higher returns, but they can also be riskier. Fast-growing companies tend to be more volatile than their more established counterparts, so while you could potentially beat the market with a growth ETF, you may also experience more volatility.
Since this fund’s inception in 2009, it has earned an average annual return of close to 18% per year. While that is significantly higher than average, keep in mind that this ETF does have a relatively short track record. We’ve been in an incredible bull market for more than a decade, and this ETF has not experienced a substantial downturn — which results in higher average returns.
This doesn’t mean you shouldn’t invest. However, it’s important to be realistic about your expectations. Although it’s extremely unlikely you’ll continue earning 18% returns over the long run, growth ETFs do have more potential to beat the market.
3. SPDR S&P 500 Dividend ETF
Dividend ETFs can be a smart investment for a couple of reasons. Not only can you earn returns on the ETF itself, but you’ll also receive dividend payments each year or quarter. By investing consistently, you could potentially create a source of passive income from your dividends.
The SPDR S&P 500 Dividend ETF (NYSEMKT: SDY) contains 114 stocks from companies that have consistently increased their dividend payments each year for at least 20 consecutive years.
This fund could be a smart option over some other dividend ETFs because it’s not solely focused on yield. Companies with high dividend yields aren’t always smart investments, and in some cases, a much higher-than-average yield could actually be a red flag. While this ETF may not include stocks with the highest yields, the companies within the fund are more likely to be solid long-term investments.
Since its inception in 2005, this fund has earned an average rate of return of over 9% per year. In addition, its most recent dividend payment was around $0.97 per share per quarter. While that may not seem like much, when you accumulate hundreds or even thousands of shares over a lifetime, those dividends add up.
Investing in ETFs can be a smart way to build wealth, but it’s important to choose the right funds. These three ETFs could make a great addition to any portfolio, strengthening your investments into 2022 and beyond.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Katie Brockman owns Vanguard S&P 500 ETF. The Motley Fool owns and recommends Amazon, Apple, Tesla, and Vanguard S&P 500 ETF. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
