Three Vanguard ETFs: Ideal Choices for Long-Term Investment

Building a diversified investment portfolio is straightforward: Invest in exchange-traded funds (ETFs). However, identifying which fund manager offers the lowest-cost ETFs can be tricky since several options exist. A top contender is Vanguard.

ETFs work particularly well with a buy-and-hold investment strategy, allowing investors to retain their positions for extended periods. Here are my three favorite Vanguard ETFs that are excellent choices for long-term investments.

1. Vanguard S&P 500 ETF

The Vanguard S&P 500 ETF (VOO) stands out with a compelling endorsement from investment legend Warren Buffett. While Buffett doesn't officially endorse ETFs like a consumer product rating, if he did, this ETF would likely earn his top praise.

Buffett's firm, Berkshire Hathaway, has invested significantly in the Vanguard S&P 500 ETF, as he believes in its long-term value. Buffett has even stated that his estate should invest cash in a "very low-cost S&P 500 index fund," implicitly recommending Vanguard's.

The Vanguard S&P 500 ETF replicates the performance of the S&P 500 index, encompassing the largest U.S. companies. The index has a historical tendency to increase over time, and because it's weighted by market capitalization, successful companies gain a larger share while underperforming ones get replaced. This system reflects a natural selection among stocks, fostering only the strongest companies.

Moreover, Vanguard's ETF boasts a remarkably low annual expense ratio of just 0.03%, making it an excellent option for long-term investors who wish to minimize costs.

2. Vanguard Total Stock Market ETF

If you're looking for even greater diversification, consider the Vanguard Total Stock Market ETF (VTI). Unlike the Vanguard S&P 500 ETF, which focuses solely on the 500 largest U.S. companies, the Total Stock Market ETF includes stocks of all sizes. By the end of 2024, it comprised a diverse portfolio of 3,609 stocks.

This ETF is also weighted by market cap, meaning its largest holdings mirror those of the Vanguard S&P 500 ETF. Its performance is very similar to that of the Vanguard S&P 500 ETF.

However, when smaller-cap or mid-cap stocks outperform larger stocks, the Vanguard Total Stock Market ETF can offer better returns than its S&P 500 counterpart. This factor can be significant because, while large-cap stocks have led the market in recent years, this trend can change.

The Vanguard Total Stock Market ETF also maintains a low expense ratio of 0.03%, well below the average of 0.77% found in comparable funds.

3. Vanguard Small-Cap Value ETF

An additional commendable choice is the Vanguard Small-Cap Value ETF (VBR). This ETF seeks to track the performance of the CRSP U.S. Small Cap Value Index, which focuses on smaller companies with attractive valuations.

As of the end of 2024, the Vanguard Small-Cap Value ETF contained 839 stocks, with none exceeding 0.81% of the overall fund. The average price-to-earnings ratio for these stocks stands at 16.1, which is considerably lower than the ratios of 27.7 and 26.8 associated with the Vanguard S&P 500 ETF and Vanguard Total Stock Market ETF, respectively.

What makes this ETF particularly appealing for long-term holders is that, historically, small-cap value stocks tend to outshine other categories. Research by Bridgeway Capital Management indicated that between July 1926 and August 2024, small-cap value stocks yielded an average annual return of 14.3% compared to 10.2% for the general market.

Although the Vanguard Small-Cap Value ETF has a higher expense ratio than its two counterparts, at 0.07%, it's still very competitive against other similar funds that average 1.1%.

ETFs, Vanguard, Investing