To get a fair mix of diversification, balance, and growth in a hand-picked portfolio of stocks, you as an individual investor might need to own shares of 10 to 20 different companies, or more. But you can achieve those same goals by investing in just a few exchange-traded funds (ETFs), as a single fund may include dozens, hundreds, or even thousands of stocks.
However, many ETFs contain many of the same stocks, particularly if they track similar indexes or market segments. But you could be pretty well diversified, and have excellent long-term growth potential, with as few as two ETFs. In fact, these two very different ETFs might be all you need, outside of your employer-sponsored plan, for retirement.
1. Vanguard Information Technology ETF
The Vanguard Information Technology ETF (VGT) has been one of the best-performing ETFs since it launched in 2004. Over the past 10 years, it has posted an average annual total return of 17.8%, which beats one of its biggest rivals, the similarly tech-focused Invesco QQQ (QQQ). And since its inception, it has had an average annual total return of 11%. While both the QQQ and Vanguard Information Technology ETFs are top-notch, I give the slight edge to the latter, not only for its superior long-term performance but also because it is more diversified.
While it is a sector fund, it covers a broad swath of the information technology sector, as it tracks the MSCI US IMI 25/50 Information Technology Index. This index includes roughly 365 stocks, including large caps, mid caps, and small caps, with certain screens and caps for added diversification. So while you get the big names like Apple, Microsoft, and Nvidia — the ETF's three largest holdings — you also get fast-growing smaller names.
In addition, the fund is made up of technology stocks across a variety of industries, including hardware, semiconductors, systems software, application software, data processing and outsourced services, consulting services, communications equipment, and electronics.
2. Invesco S&P Ultra Dividend Revenue ETF
The Invesco S&P Ultra Dividend Revenue ETF (RDIV) has very different exposure from the Vanguard Information Technology ETF. It also performs well in bear markets, so it provides a nice balance to the growth-oriented ETF. It's built to generate dividends, which contribute significantly to its total returns, particularly in a market like this, and can generate income for investors who decide to take the distributions rather than reinvesting them.
This ETF tracks the S&P 900 Dividend Revenue-Weighted Index, which includes the 5% of stocks from the S&P 900 with the highest dividend yields. Then, the ETF has more screens to ensure that the companies it holds are stable, that the portfolio is diversified, and that the dividend is safe. Specifically, from those high-yielding stocks, the fund picks the top 5% of stocks in each sector that have the lowest dividend payout ratios. That improves the chances that the companies in the portfolio will be able to sustain their high dividends even in bad markets. As a further screen to ensure stability and growth, the stocks are weighted by revenue.
The portfolio has a target of 60 stocks. Currently, Best Buy, Walgreens Boots Alliance, and Chevron are its three largest holdings.
Year to date, the ETF is beating the overall market with a return of 6.1% as of Dec. 29. It doesn't have a 10-year track record yet, as it launched in 2013, but since its inception, it has an average annual total return of 10.4%. And if you choose to take the dividends, it has a 12-month distribution rate of 3.48%, which is the average yield of the portfolio over the past 12 months.
While you may want to further diversify your portfolio with other investments over time, a base that included just these two ETFs would help you navigate the ups and downs of the market and generate long-term returns to supplement a work-based retirement account.
Originally published on Fool.com
Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Best Buy, Microsoft, and Nvidia. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.