The market’s been red hot of late. The S&P 500 is up 45% since the bear market ended in late 2022, and it is higher to the tune of 27% just since October 2023’s low.
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Many investors were too nervous to dive in during this stretch, fearing renewed economic weakness was just around the corner. If you were one of these people, don’t beat yourself up. There’s still plenty of upside left to plug into. You’ll just want to make sure you don’t repeat the mistake by missing out on any more of the market’s gains. Exchange-traded funds (or ETFs) make this much easier to do by sidestepping the need for stock picking.
Here are three ETFs you may want to consider buying and then just sitting on for several decades. They make it easy to capitalize on all of the market’s long-term potential without any further action needed on your part.
1. Technology Select Sector SPDR Fund
Technology stocks have a bit of a reputation for being volatile. And that reputation is well deserved; these are historically the market’s most volatile stocks. They’re so volatile, in fact, that at times they can be uncomfortable to stick with. Many investors also feel like they have to check in on these tickers every day. That gets old pretty quickly.
Still, they’re arguably worth the trouble. The technology sector’s stocks have outperformed the broad market for the better part of the past three decades.
This makes sense, of course. After all, these underlying companies are also the ones that introduced the world’s most impactful advancements during this period.
The thing is, tech companies are most likely to unveil the most game-changing developments over the next three decades as well. Rather than trying to figure out which companies are going to lead the charge, why not just own a basket of all the major technology stocks with a position in the Technology Select Sector SPDR Fund (NYSEMKT: XLK)?
The fund is designed to mirror the performance of State Street Global Advisors’ Technology Select Sector Index, a basket of about 65 tech stocks within the S&P 500 index. Its top holdings right now are Microsoft, Apple, and Nvidia. But if and when these market (and market cap) leaders are outperformed by smaller or younger names in the future, the fund’s regular rebalancing will reduce its exposure to these more familiar companies and add more exposure to the up-and-comers.
In other words, you don’t have to guess which stocks need to be bought or sold — State Street will take care of that for you.
2. Vanguard Dividend Appreciation ETF
For some investors the idea of owning dividend-paying stocks instead of growth stocks is boring. That line of thinking, however, misses a key point of being an investor in the first place. That is, your goal isn’t to be entertained — it’s to make money! And dividend stocks can help you do this far more than you might suspect.
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Mutual fund company Hartford crunched the numbers. Between 1940 and 2023, 34% of the S&P 500’s total net return is attributable to dividends. The real workhorse, however, is reinvesting any dividend payments you may receive as time marches forward. Hartford adds that reinvesting dividends paid out during this stretch into more shares of the S&P 500 would improve a capital-appreciation-only gain of just under 8,000% to a net gain of more than 50,000%.
Here’s the kicker: In the long run the market’s very best dividend-paying stocks outperform the average non-dividend payer anyway. Hartford adds that between 1973 and 2022, shares of companies that reliably paid and raised their dividends gained an annualized average of right around 10%. For non-dividend-paying S&P 500 stocks, the average annual gain during this time is just under 4%. These solid dividend stocks were also less volatile, allowing their owners to sleep better at night.
Given all of this, the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) seems like a no-brainer holding for most people, including those who ultimately want growth rather than income. Just as the name suggests, the fund is based on the S&P U.S. Dividend Growers Index, which holds stocks that have raised their annualized payouts for at least the past 10 consecutive years.
3. SPDR S&P 500 ETF Trust
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Last but not least, if you’ve missed out on the bull market recovery thus far, the smart-money move to avoid missing any more of it is stepping into a stake in the SPDR S&P 500 ETF Trust (NYSEMKT: SPY).
Yes, this is the most simplistic and passive way of investing. It’s not an attempt to beat the market — it’s just a means of matching the broad market’s performance, for better or worse.
This may still actually be your best bet for a sizable portion of your portfolio, however.
See, beating the market by picking individual stocks is tough to do. It’s so tough to do, in fact, that not even most professionals can do it for very long. Standard & Poor’s reports that nearly 60% of large-cap mutual funds available to investors in the United States actually lagged the S&P 500 index in 2023. For the past five years, nearly 79% of these fund managers didn’t beat the market. Over the course of the past 10 years, more than 87% of large-cap mutual funds underperformed the S&P 500.
If these well-trained and well-equipped professionals can’t do it, how tough is it for an ordinary individual investor such as yourself to do so?
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That’s not to suggest you should never own any individual stocks. See, you have a couple of advantages on most mutual fund managers. The first of these is, you don’t have a boss standing over your shoulder expecting strong results each and every quarter; you can afford to be patient with your picks. And second, your trades aren’t so big that buying and selling stocks can move that stock’s price. Mutual funds’ trades can do that.
Nevertheless, for most investors, the best foundational holding in any growth-seeking portfolio is a position in an index fund like the SPDR S&P 500 ETF Trust.
