- Exchange traded funds have exploded
in popularity since 2003,
going from 276 of them to well over 8,000 as of 2022.
ETFs are a great way for average people like us
to build wealth in the stock market
because they're the perfect investment
to holding places like a Roth IRA, HSA,
and taxable investment account.
But not all ETFs are created equally,
and with over 8,000 of them out there,
it's extremely difficult to figure out
which ones you should be investing in.
Because I can tell you that 99% of those 8,700 are trash
and you should avoid them at all costs.
In this video, I'm gonna help you cut through the noise
by going through my top five ETFs
that you can feel comfortable buying and holding
literally forever based on the criteria
that you see on screen right now.
Quick disclaimer, these top five ETFs
are all based on my personal opinion.
All of these ETFs come with a risk of losing money.
I'm by no means suggesting
that you should hold these funds
individually or all together.
Every good portfolio starts with a core holding
and the Vanguard Total Stock Market ETF VTI
is a great way to start building any portfolio.
Think of it like the foundation of a house
that you are going to build.
That's because it seeks to track the performance
of the total US stock market
by investing in a little under 4,000 stocks.
As more new companies go public and others die off,
the holdings in this fund will grow and shrink accordingly.
The goal of this fund is to match the returns
of the overall US stock market.
Because this ETF holds the whole stock market,
you are going to have exposure to large cap, mid-cap,
small-cap, and micro-cap stocks.
It's the ultimate diversified fund for US stocks.
Past performance tells us nothing
about how a fund will perform in the future
so keep that in mind as I go through these.
The one year return is down
because we are still recovering from 2022 being a down year.
Then it's in the 9% range for the three and five year,
12% for the 10 year, and a little under 8%
since this fund was created.
A $1,000 investment into VTI since it was created
would've turned into a little over $5,000 today.
Quick reminder that I've chosen my best ETFs
based on how well they fit into my criteria
that I mentioned at the very beginning,
not because of past performance.
A more important thing to understand
is the largest drawdowns that this fund has seen
since it was created.
This is going to tell you how bad things can get
when the market is at its worst.
As a long-term investor,
if you can't hold onto the fund during the bad times,
then you won't be able to profit from the returns
that I just went through.
VTI has been around since 2011,
but I wanna get a larger sample size
to show you how much a fund like this can go down in value.
All of these numbers are from a general total US stock fund.
Check out these drawdown numbers
and how long it would've taken this portion
of your portfolio to recover.
The 2007 crash would've cut your portfolio in half.
Think about that for a minute.
If you had a million dollars before that,
then you'd be left with $500,000.
Yes, it would've eventually recovered,
but you would've had to have held on for three years
until it actually did so.
Pretty nuts to think about
and why I like to remind people
to just buy, hold, and continue investing no matter what.
Because if you were investing while this fund was recovering
over that three year period,
then you'd end up with even more money.
None of these drawdowns
should scare you away from this fund
because as you can see ups and downs
are a part of the market cycle.
It's as normal as brushing your teeth every single morning
and hopefully every single one of you
brush your teeth every morning.
The cost of this fund is extremely low,
which is a good thing.
Expenses always have and always will matter
because they eat into the returns that you receive.
Do not let anyone ever tell you differently.
Here's a quick guide on how much fees
will eat into your portfolio's future value
over a 40 year period at an average annual return of 8%.
The cost of VTI is 0.03% per year.
So for every $1,000 you have invested,
it will cost you 30 cents
and only reduce your future portfolio value
by 1% over 40 years.
Vanguard has the risk level of this fund
at a four out of five.
They consider this to be moderate too aggressive.
The main reason for this is because all of VTI's holdings
are in stocks,
which will have a wide range of price fluctuations
over the short term.
As long as you are holding this fund for 10 or more years
then this isn't anything to be concerned about.
Since VTI is a market cap weighted fund
the sector breakdown is going to be based on that.
As you can see on screen,
most of the money you put into this fund
is going to go into tech healthcare, industrials,
and consumer discretionary as of right now.
None of this is a good or bad thing
because the overall market
is determining how much should be allocated to each one.
The top 10 holdings are a lot of companies
most of you recognize.
As of right now, these top 10
make up about 20% of the holdings within this fund.
VTI is for the investor who is looking
to match the returns of the total US stock market
by putting your money into terrible companies,
okay companies, good companies, and great companies.
If you wanna reduce volatility
by investing in those larger companies
while also gaining exposure
to those more volatile mid, small, and micro-cap companies
without being too overweight in them,
then VTI is the perfect ETF for you.
It's really difficult to find those stocks or funds
that will continue to outperform the market
over the long term.
So instead of trying to predict the future,
this fund allows you to hold everything.
As the legendary Jack Bogle once said,
why look for a needle in a haystack
when you can just buy the whole haystack?
VTI is a great fund to hold for your US stock allocation
within something like the two or three fund portfolio.
I'll have my two and three fund portfolio videos
linked in the playlist above my head
at the end of this video and down in the description below.
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If you are looking for a different core portfolio holding
then the Vanguard S and P 500 ETF VOO is a great alternative
to the the Vanguard Total US Stock ETF.
There's really no reason to hold both at the same time
if you don't have to.
Because there's a portfolio overlap
of about 85% between the two funds.
In normal persons speak,
this means that the holdings in VOO,
make up 85% of VTI, which according to math is a lot.
VOO invests in the S and P 500,
which is made up of the 500 largest companies
in the United States.
The goal with this fund is to match the returns
of the overall stock market.
Now, even though this ETF only holds 500 companies
these stocks are so big and make up
such a large portion of the overall stock market,
that it's considered to be a good gauge
of overall US stock returns.
When it comes to past performance,
here's how it looked over the past 10 years
and since inception.
The one, three, five, and 10 year returns
look about the same as what we saw with VTI,
but the biggest difference is
with the return since the fund was created.
Now, VOO has a 13% average annual return,
which is way higher than the average annual return
of 7.8% for VTI.
This can be extremely misleading
because of where the stock market just happened to be
when each of these funds were created.
So if you were comparing the two,
then it would be better to look at it
based on the one, three, five, and a 10 year,
which we can see are pretty darn close to each other.
A $1,000 investment into VOO
when it was created 12 years ago
would've turned into a little over $4,000 today.
Since VOO has only been around since 2010,
I'm actually going to do the same thing that I did with VTI.
We're going to look at the drawdowns
for a general S and P 500 fund.
The drawdowns for this type of fund are almost identical
and only off by either a few months for when they start
and a few months for how long they lasted.
Also, the drawdown amounts are within 1% of each other.
Remember that these things happen when you are investing.
The best thing that we can do
is build a well diversified portfolio of ETFs,
which is what my top five ETFs are here to help you with.
VOO is also extremely low cost at 0.03% per year.
For every $1,000 you have invested,
it will cost you 30 cents
and will only reduce your portfolio value by 1%
over 40 years.
Vanguard has this at a risk level of four
since it's a 100% stock based ETF,
which is in line with what we would expect.
Here's the sector breakdown for VOO.
As you can see, a lot of the portfolio
is made up of tech, healthcare, financials,
and consumer discretionary.
Since VOO is only made up of the 500 largest stocks,
the top 10 are going to be made up
of companies that we are all familiar with.
These top 10 make up almost 25% of the 500 companies
in the CTF
VOO is for the investor
who is looking to match the performance
of the US market through the 500 largest stocks.
Since it doesn't have any exposure to those mid, small,
and micro cap stocks,
it's going to see less volatility
compared to a total market fund like VTI.
VOO is a great ETF to put inside something
like a two or three fund portfolio.
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Now that we have the foundation built with VTI or VOO,
we need to start building out the rest
of this diversified portfolio.
The Vanguard Total International Stock ETF, VXUS
is great for that.
VXUS seeks to track the performance of stocks
for all of the companies outside of the United States.
This ETF is made up of 7,900 stocks across the world.
Here are the returns over the past one, three, five,
and 10 years.
Compared to the two US funds we just talked about,
the performance has been terrible.
So you might be asking yourself,
why in the world is this crazy guy adding this
to his top five?
And the answer is because it meets the criteria
that I mentioned at the very beginning of the video.
I'll go into more detail when I talk about
who this fund is for, so hang on for a minute.
$1,000 invested into VXUS
since it was first created 11 years ago
would've turned into $1,900.
Since VXUS has only been around since 2011,
I'm going to pull the drawdown data
from a general global XUS fund
so that we can get a good look at all of them.
History is a good reminder that every single person
watching this right now, including myself,
will experience many more large downturns
between now and when we eventually stop investing.
The only advice that I have for times like these
is to build a well diversified portfolio ahead of time
and continue investing into it
no matter what's happening in the world or the stock market.
the XUS is extremely low cost coming in at 0.07% per year
or 70 cents for every $1,000 invested.
As with 100% stock based ETFs,
the risk level for this one is high at a level five.
Volatility is generally higher for international stocks
so that's why Vanguard has this one at a five
instead of a level four like we saw with VTI and VOO.
Nothing to be too concerned about
if you are holding this for 10 or more years,
what you would be
since that's who I'm making this video for.
As you can see with the sector breakdown,
this ETF has most of your money going into financials,
industrials, tech and consumer cyclical.
Since this is an international fund,
here are the regions where your money is going.
Europe, emerging markets, and the Pacific
make up around 90% of it.
There are a ton of countries that this fund invests in
so here are the top 10 and the percentage each one makes up.
The top 10 companies are made up of a lot
that you probably recognize
since they're true global brands.
VXUS is for the investor that is looking
to own everything outside of the US.
This ETF is perfect for the international portion
of a two or three fund portfolio.
No need to buy any other international ETF
because this one has you covered by investing in everything.
I'm not gonna go super deep
into why I think everyone
should be holding a little international.
I made a whole video laying out all of my thoughts,
which I'll link above my head and down in the description.
But when it comes to past performance,
don't let recency bias cloud your judgment.
I agree that international hasn't performed well as of late,
but I can show you proof that there are time periods
where international outperforms US.
The whole point of a well diversified portfolio
is to make sure that you are covered across the globe
and by refusing to hold an ETF like VXUS
and only holding something like VTI or VOO,
you are not truly diversified across the world.
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Okay, I'm ready for a little controversy.
My next favorite ETF
is the Vanguard Intermediate Term Treasury ETF, VGIT.
Yes, I woke up this morning and decided to choose violence
by putting a bond fund in my top five here on YouTube.
I feel like I just committed a crime
so maybe I should be thrown in jail.
This fund seeks to provide a moderate and sustainable level
of current income using US treasury bonds.
Just so we're all on the same page,
short term bonds mature in less than two years.
Intermediate term bonds mature in two to 10 years.
And long term bonds mature in over 10 years.
This is an intermediate fund.
Don't worry, we'll discuss why I put this one on the list
in that part of the video, so settle down.
Here are the returns over the past one, three, five,
and 10 years.
Let me remind you that this isn't a stock-based fund
so don't compare it to those returns.
$1,000 invested into VGIT when it was created 13 years ago
would've grown to $1,320.
Don't freak out about that minimal growth.
Bonds aren't expected to grow like stocks are.
This is also a low cost fund coming in at 0.04%,
which is 40 cents for every $1,000 invested.
The risk level is at a two
since it is a conservative to moderate fund.
These are 100% US treasuries
and the maturity date breakdown is currently at 53 and 46%.
Okay, so what type of investor is VGIT for?
The person who is looking to reduce volatility
within their portfolio,
doesn't want to take on additional levels of risk
with a long-term bond fund
and doesn't want the lower returns
associated with short term bonds.
If you are someone who is further out from retirement,
then a fund like this might not make sense to hold
in your portfolio, but that doesn't mean that you can't.
In the past, I preferred a bond ETF like BND,
but I've since changed my mind
and have switched to preferring VGIT right now.
To be clear, I still like BND
and would put it as my number two bond fund,
but at this point I like VGIT a little better.
The main reason is because something like BND
has around 25 to 30% allocated to corporate bonds,
which are inherently more volatile
compared to government treasuries.
Corporate bonds are also more correlated to stocks
than government treasuries.
And for me, the point of holding bonds in the first place
is to not be correlated to stocks.
VGIT works well in a three fund portfolio.
You'll also want to pay attention
to where you hold your bond allocation.
Generally, a more tax efficient place to keep this fund
is in a pre-tax retirement account like a 401K
or traditional IRA followed by a Roth IRA.
You'd probably want to avoid putting a bond fund
in a taxable investment account at all costs if you can.
From a behavioral perspective
I can understand why someone who is younger
and a little more risk averse
might want to add this to their portfolio.
No, you won't be maximizing your returns
during the good times,
but you'll most likely reduce your overall losses
during the bad times.
It is not always about maximizing returns.
It's also about being able to stay invested
for longer than the people who think
that they can handle stock market volatility in theory,
but run for the hills when it actually happens.
Now we need to talk
about the Vanguard Total World Stock ETF, VT.
I used to dislike it,
and to be honest I don't invest in it,
but I've come to my senses and realized the value in it.
This fund seeks to track the performance of stocks
across the whole world based on market cap.
Think of this fund like VTI and VXUS combined into one fund.
It's made up of around 9,500 stocks.
Here are the one, three, and five year returns.
Since this fund has international
and these stocks have underperformed US recently,
it makes sense why this fund is lagging behind
something like VTI and VOO.
$1,000 invested into this fund
when it was created 14 years ago
would've turned into $3,825.
Here are the max drawdowns for this fund.
We're currently in the middle of the largest drawdown
so we'll see how long it takes to recover.
As with all of the other funds,
this one is low as well, coming in at 0.07%,
which is 70 cents for every $1,000 invested.
Vanguard has the risk level at a four
since this is 100% stocks, which is to be expected.
Here's the sector breakdown
with most of the money going into tech, financials,
and healthcare.
61% of the holdings are in North America
followed by Europe and the Pacific.
58% is in US companies
followed by Japanese and UK companies.
Since this fund is dominated by US,
you can see that those types of companies
make up the top 10.
VT is great for someone
who just wants to accept world market cap returns.
I don't hate this strategy at all
for someone who wants to be very hands off,
but not as hands off by investing in something
like a target date fund.
Other than potentially having to add a bond allocation
at some point in the future,
this is the ultimate set it and forget it.
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