What’s the easiest way to build a diversified portfolio? That’s easy: Invest in exchange-traded funds (ETFs). Which fund manager offers the lowest-cost ETFs? That’s not quite as easy, because there are several contenders. However, Vanguard is one that immediately comes to mind.
ETFs are especially good to use with a buy-and-hold investing strategy. Here are my three favorite Vanguard ETFs to buy and hold for decades.
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1. Vanguard S&P 500 ETF
Warren Buffett doesn’t give a seal of approval to ETFs like Good Housekeeping does with consumer products. If he did, though, I suspect the Vanguard S&P 500 ETF (VOO 0.57%) would be the first to receive such a distinction from the legendary investor.
Buffett’s Berkshire Hathaway portfolio includes only two ETFs, with the larger stake in the Vanguard S&P 500 ETF. The “Oracle of Omaha” also revealed several years ago that his will instructs that the cash his family inherits be invested in a “very low-cost S&P 500 index fund.” And Buffett suggested Vanguard’s.
I fully agree with Buffett’s opinion. The Vanguard S&P 500 ETF, as its name indicates, owns all the stocks in the S&P 500 index. The S&P 500 has always risen over the long term. It’s weighted by market cap, which means companies that succeed and grow larger become more prominent in the index while those that languish are eventually replaced. I like this survival-of-the-fittest methodology.
You’re not going to find a cheaper S&P 500 ETF than Vanguard’s either. Its annual expense ratio is only 0.03%. This ETF is an ideal one to own over the long term. Just ask Buffett.
2. Vanguard Total Stock Market ETF
Want even more diversification? Check out the Vanguard Total Stock Market ETF (VTI 0.49%). While the Vanguard S&P 500 ETF owns the stocks of the 500 largest U.S. companies, this Vanguard ETF owns stocks of all sizes. As of Dec. 31, 2024, the Vanguard Total Stock Market ETF’s portfolio included 3,609 stocks.
Because it’s weighted by market cap, the fund’s top holdings are identical to the Vanguard S&P 500 ETF’s (all of the so-called “Magnificent Seven” stocks are in the group). Unsurprisingly, the Vanguard Total Stock Market ETF’s performance correlates highly with the Vanguard S&P 500 ETF.
However, during periods when small-cap or mid-cap stocks outperform large-cap stocks, the Vanguard Total Stock Market ETF will be a bigger winner than the Vanguard S&P 500 ETF. Although large-cap stocks have dominated in recent years, that isn’t always the case.
This Vanguard ETF is also quite inexpensive to own. Its annual expense ratio is 0.03% compared to an average expense ratio of 0.77% for similar funds.
3. Vanguard Small-Cap Value ETF
I also really like the Vanguard Small-Cap Value ETF (VBR -0.72%) as a core part of a buy-and-hold strategy. This ETF attempts to track the performance of the CRSP U.S. Small Cap Value Index, which focuses on the stocks of smaller companies that offer attractive valuations.
The Vanguard Small-Cap Value ETF owned 839 stocks at the end of 2024. Although the fund is weighted by market cap, none of those stocks made up more than 0.81% of the fund’s total portfolio. The average price-to-earnings ratio for these stocks is 16.1, well below the P/E multiples of 27.7 and 26.8 for the Vanguard S&P 500 ETF and Vanguard Total Stock Market ETF, respectively.
What makes this Vanguard ETF stand out as a great pick to buy and hold for decades? Over the long term, small-cap value stocks have outperformed other stocks. For example, Bridgeway Capital Management found that between July 1926 and August 2024 small-cap value stocks delivered an average annual return of 14.3% versus 10.2% for the overall market.
You will have to pay more in expenses with this ETF than the other two on the list, but only a little more. Its annual expense ratio is 0.07%. That’s still cheap compared to similar funds, which have an average expense ratio of 1.1%.