Best ETFs For August 2022

In this article, we're going to talk about five ETFs that I think are crucial to understanding for all new investors. And if you understand these five ETFs I'm going to talk about, it's hopefully going to make you a more intelligent, informed investor and make better decisions in your portfolio. With that being said, I'm not a financial advisor. This obviously isn't financial advice.

What is an ETF? ETF stands for exchange-traded fund. This is basically a big basket of stocks that allows you to be diversified without buying individual companies. This basket may follow a stock market index like the s&p 500 or even an individual sector. But in this article, we're gonna be talking about five ETFs that in my opinion, are especially important. 

These are going to be the Bogle head style index fund ETFs. Now, what the heck does that mean and what is a Boglehead? Bogleheads follow an investment philosophy that emphasizes starting early, living below your means, and investing in diversified index funds. 

The name comes from Jack Bogle, who was the founder of Vanguard, and is credited with creating the very first index fund index funds that allow you to invest passively with low fees and reap the benefits of economic growth and expansion in your own portfolio. The idea is rather than search for the best individual stocks, you should just buy the entire market. Or rather than search for the needle in the haystack. Just buy the haystack. 

#1. NUMBER

The first ETF we're going to talk about and this is actually where I started investing. This is going to be VOO or you can say Vu the full name of this ETF is the Vanguard 500 index fund ETF. This fund invests in stocks that are in the s&p 500 index, which holds 500 of the largest US companies VOO is designed to track the performance of the s&p 500 and essentially mirror its returns. 

When we talk about indices like the s&p 500. It helps to understand that this is a market capitalization-weighted index. Or more simply put, the stocks in the s&p 500 are weighted according to their market cap. Market cap is just a measure of the total value of all the shares of a stock added up companies with a larger value will be assigned a larger percentage within the s&p 500. 

And since VOO tracks the s&p 500 the same percentages apply. We can look at the top 10 holdings or stocks within VOO and you'll see that they are assigned these weighted percentages. The good thing about Vanguard funds is the expense ratio is usually pretty low. With VOO we have an expense ratio of 0.03%. In other words, this is $3 paid annually for every $10,000 you invest. 

It's always important to check this expense ratio when choosing an ETF or mutual fund. Some actively managed funds can be as high as one to 3%. Now let's look at the historical returns of VOO Since its inception in 2010. We've had an annual return of 14.23%. Now VOO itself has only been around since 2010, but the s&p 500 has been around much longer.

For a more accurate possibly better perspective. Let's see what the annual return would be over a longer period since the s&p five hundred inceptions in 1957. From 1957. Until today, the s&p 500 has returned about 10% with dividends reinvested. So going forward, this might be a more conservative estimate for VOO over long periods. 

The good news is if you invested $10,000 in the s&p 500 in 1957 with no further contributions, you would have about $2.6 million today. With index funds like VOO, we've mentioned briefly. You are also paid with what's called a dividend. Dividends are just when companies distribute cash or stock to the shareholders or you directly some companies pay dividends to shareholders. 

Others just reinvest the cash back into the company. The dividend yield for VOO at this time is about 1.65% According to Seeking Alpha, this dividend can change over time as companies within the index change their dividend yield. 

#2. NUMBER

The second ETF on our list is VTI or (Vanguard total stock market index fund ETF) before I get started, it's important to know The returns for VTI and VOO are almost identical. It's like extremely close. This is because they have a lot of the same holdings. But instead of tracking the s&p, 500 VTI tracks something called the CRSP, US total stock market index. 

Unlike the s&p 500 which holds 500 of the largest companies, the total stock market index holds pretty much every company in the US large, medium and small-cap companies, instead of holding 500 stocks. VTI consists of about 4100. VTI just like VOO is weighted by market cap. 

So the top 10 holdings of VTI and VOO are essentially the same companies. But with slightly different weights. As you get into some of the smaller market cap companies they make up very small pieces of the pie at a low percentage. VTI has an expense ratio the same as VOO 0.03% and the dividend yield for VTi is currently 1.62%. 

It makes sense that this dividend yield is point zero 3% lower than VOO since VTI holds more small and mid-cap companies a lot of these companies are still reinvesting all their cash into growth, rather than paying out dividends. Not that 0.03 makes a huge difference in returns. But it's good to understand the fundamentals of why we have a diversion there. 

Since VTI was created in 2001. We've had an annualized return of about 8.06%. So now the magic question is VTI or VOO when comparing VTI and VOO it helps to do a little bit of backtesting. So I went to portfolio visualizer.com and compare these two funds since 2010. In this backtest, we can see I used an initial investment balance of $10,000 and I chose to reinvest dividends in both portfolios.

VOO actually outperformed slightly over the past 10 years with a compound annual growth rate about point four 6% Higher. Now does this mean VOO is better or will always perform better? Not necessarily. To be honest, there are arguments for both sides here. But I think the important thing to realize is these two funds are almost identical from holdings to expenses and even dividends.

There's pretty much no point in owning both of these ETFs. And it doesn't really make your portfolio any more diversified to have VTI and VOO my personal strategy right now is just to pick one.

#3. NUMBER

The third ETF on our list is VXUS. VXUS is the Vanguard Total international index fund. Yep, believe it or not, guys, there are countries outside of the United States and they got companies too. So with VXUS, you get an ETF that seeks to replicate the performance of global markets excluding the US because of this lack of exposure to US stocks within VXUS. 

This is generally used as a tool in addition to VTI or VOO to give you international exposure. According to Vanguard, they recommend at least 20% of your portfolio be invested internationally and up to 40%. VXUS itself holds over 7000 stocks and represents over 300 billion in net total assets. 

If we take a look at the top 10 Holdings, you'll see this is also a market cap-weighted index, we have some familiar names like Taiwan, semiconductors, Samsung shell, and AstraZeneca. The expense ratio for VXUS is going to run you about 0.07%. So about $7 for every 10,000 invested. 

Now let's look at the historical return since 2011. VXUS has had an annual return of 4.06%. While this may seem low, and I would agree with you there, some would argue that this could be a value play as emerging markets in the developing world grows VXUS could have improved performance in the future. 

What is the best performing ETF?

VXUS has a 3.72% dividend yield. This dividend yield is more than double that of VOO or VTI. There are a few points I want to make about international funds. The first is that investing internationally, alongside something like VTI or VOO makes your portfolio more diversified.

Instead of owning 500 or 4000 stocks, you now own an additional 7000 companies all over the world. This diversification may potentially lead to reduced risk. You're no longer reliant on just US companies doing well. Generally, when we add more assets or stocks to a portfolio, we're going to reduce volatility or just the wild price swings. This isn't necessarily good or bad for returns long term, but it can be a smoother ride.

One risk I want to mention with international stocks is currency risk. When you invest in assets outside of the US. There's a chance that the US dollar gains value relative to these foreign currencies, weakening your investments outside of the US throughout history, there have been periods where the US dollar weakens and strengthens relative to these foreign currencies. 

#4. NUMBER

The fourth ETF is VT. VT represents the Vanguard Total world stock ETF. With this one ETF, you own stocks all over the world, including US stocks. In this ETF you have actually over 9000 companies 62% of the exposure being in North America. So in a way, this fun kind of takes Vanguard's 20 to 40% Rule recommendation for international funds and just does it all for you.

If we take a look at the top 10 Holdings the names are actually identical to VTI and VOO however, they are now at even lower percentages. Since we need to fit like 9000 other stocks into this portfolio. VT has an expense ratio of point zero of 7%. So the same as VXUS.

And if we want to look at the historical return since 2008, we've had an annual return of about 6.8%. Like other ETFs, we have a dividend yield and for VT that's currently sitting at 2.32%. So let's talk about having a 100% VT portfolio versus maybe a 100% VTI portfolio. 

The major advantage with VT is you have one less letter so it's gonna save you a massive amount of time typing this out. No, but seriously, the difference here is VTI is 100%. US stocks, VT is global, including about 60% of the US by investing in VTi, you're betting that the US economy will continue to outperform the global market and provide you increased returns.

However, you're going to pay more for these stocks, relative to the returns. The price-to-earnings ratio for VTI is currently 19.3% Where VT is only 15.4%. This basically just tells you that VT is cheaper relative to what it's being valued at. But if US companies continue to grow at a faster rate, VTI could potentially still outperform when comparing these two, you also have to realize they are completely different. 

As far as diversification. It's really two different schools of thought whether you want to be 100% us or diversified throughout the entire world. Another thing to consider is that US companies actually kind of give you global diversification themselves. Think of companies like Apple, BP, and McDonald's, these companies all operate globally and generate massive profits overseas. So in a way, by investing in US equities, someone argues you are gaining exposure to the global economy as well. 

#5. NUMBER

The fifth and the last ETF is the BOND ETF. Now, I'm not going to go into super detail about the fundamentals of bonds and how they work. But a bond is basically just a fixed income asset that pays you as the buyer a fixed interest rate. The other benefit of bonds is that they're not really correlated to stock returns. 

So often when we have stocks going down or a market crash, you'll actually see bonds rise in value. Essentially, bonds are a way to stabilize your portfolio and give you less volatility in the long term. The bond ETF I'm going to mention today is another Vanguard ETF called BD, or the Vanguard Total bond market ETF. 

This ETF allows you to gain broad exposure to US investment-grade bonds or high-quality bonds. And like we said, this is mainly used as a tool to diversify the risk in your portfolio and smooth out the ride. This bond ETF has an expense ratio of 0.03%. And since our inception in 2007, we've had an annualized return of 3.26%. And currently, we're sitting at a dividend yield of 2.46%. 

So since we're talking about diversifying your risk away from stocks, bonds generally don't represent 100% of your portfolio, you're generally still going to use the ETFs. We mentioned previously, like VTI, or VXUS. So how do we decide how much to actually allocate toward bonds?

there are a ton of rules of thumb out there some say 10% in bonds, others say 100 minus your age is the amount you should have in stocks, the rest of bonds. There are also those who get more aggressive and say 110 minus your age, this really all comes down to your risk tolerance, and how much you can stand your portfolio fluctuating from these formulas.

You'll see that your bond exposure generally increases as we age. This is mainly due to the fact that market volatility and big crashes become way more of a risk, the closer we are to retirement. If my portfolio crashes 40% And I'm supposed to retire in two years, that's gonna be really not good.

Whereas maybe if I had some bonds in that scenario, I'd only be down 20 or 10%. More money in bonds is going to lead to a more stable portfolio but may come at the cost of decreased returns over the long term. If you believe you can stand a lot of volatility you have a really high-risk tolerance and you're young, you may choose to allocate more money to stocks.

But overall, I think bonds are an essential tool that all new investors should seek to understand. And if you don't want to worry about this allocation at all, buying these individual ETFs and rebalancing them, you can always buy something like a target date fund that essentially does this for you. The trade-off here is that you get a little less control and you may pay a slightly higher expense ratio.