The Best Vanguard ETFs For Financial Independence
I want to talk about ETFs, and how our investments in ETFs have been a huge help in securing our financial independence. Our ETFs have been on a tear lately, and have been up as high as 45%!
As amazing as this is, we’re not going to get into the nitty-gritty details just yet. First, I want to define what an ETF is, and why you should consider investing in one yourself.
What Is An ETF?
An ETF is an Exchange-Traded Fund that is traded on the New York Stock Exchange, NASDAQ and virtually anywhere else there is a stock exchange.
If you’re familiar with buying and selling stocks, you’ll see that ETFs are bought and sold in the same way. However, they are unique in one specific way: they hold hundreds or even thousands of stocks and bonds in a single fund.
If you’ve ever held a mutual fund or index fund, you’ll also understand how ETFs are owned. They have a built-in diversification and you can own them at a low cost.
Why ETFs Over Mutual or Index Funds?
So why do Amon and I sometimes choose to invest in ETFs over mutual or index funds?
ETFs Are Cheaper
For example, to invest in the Vanguard mutual fund VITAX you need to start off investing at least $100,000, which isn’t doable for most people.
The VGT is an equivalent Vanguard ETF, and you only need $1 to start investing in a VGT. That’s an enormous difference.
More Unique Investment Choices
There are thousands of ETFs on the market that invest in unique things. Vanguard alone offers over 50 ETFs in a variety of sectors, including ETFs that:
● the total stock market
● specific sectors of the stock market
● international funds
● Special sectors like real estate, energy, finance, utilities, etc
And much more.
There are great tax advantages of investing in ETFs because they are structured so that you only pay capital gains tax when you sell them. This is compared to mutual funds, where capital gains tax is incurred as the shares within the fund are traded during the investment's lifetime.
Easy To Buy And Sell
Because they trade like stocks, you can buy whichever ETF you want on your trading platform. Using our Vanguard account we can buy ETFs by pushing a button.
It’s a little different if you’re buying or selling an ETF from a company that isn’t producing the ETF, but you only have to pay a small fee as a trading commission to do so. However, you can also buy and sell ETFs very quickly, even quicker than an index fund.
This is brilliant if you happen to see a huge and sudden fluctuation or change in the market. We often make big purchases of ETFs when we see a change in the market and make a point to figure out which ones we want to invest in, and why.
ETFs That We Invest In
And now for the juicy details! I want to talk about the actual ETFs that Amon and I invest our money in. So I’m going to dive into our Vanguard portfolio and show you what we’re investing in.
VYM is a Vanguard high-dividend ETF that currently sits at $111 per share, with a dividend of around 3%. At 0.06% the expense ratio is also super low.
What’s interesting about VYM is that it has an equivalent, the Vanguard high dividend yield Fund Admiral Shares. The expense ratio on this one is closer to 0.08%, slightly higher than the VYM with an investment minimum of $3000.
VYM is made up of 420 companies with above-average dividend yields. These include healthcare, financial, and consumer goods companies with high dividends, such as Exxon, Mobil, JP Morgan, and more.
We like VYM because it has a high dividend, and is made up of companies that tend to react differently when the stock market drops.
The current price of VGT is $503, and its dividend yield is 0.65%, and an expense ratio of 0.1%. It’s made up of over 300 different tech companies.
Over the years the VGT has been one of our favorite ETFs and one of the most lucrative. In 2023 it was up over 40%!
That’s technology for you. VGT is a momentum ETF because it invests in big tech companies that are constantly pushing it forward. One thing to remember about the VGT is that it is market-cap-weighted, which means that the fund’s top ten percent of holdings make up fifty-five percent of its total assets. You want to make sure these ten-percenter companies are the ones you want to invest in.
The VGT is also a great way to invest in big tech companies like Apple and Microsoft, without having to spend huge amounts of cash to purchase them individually.
VTI’s current price is $240 per share, with a dividend yield of 1.44% and an expense ratio of 0.03%. This is even lower than the VTSAX, with its expense ratio of 0.03%.
It’s made up of 3500 small, mid-sized, and large companies. In our opinion, the VTI’s low-cost broad diversification and potential for tax efficiency are what make it so great!
Remember that VTI is also the ETF version of the VTSAX, and just like the VTSAX, it tracks the total stock market. The major difference between the two is that the VTI is much cheaper to enter, costing only $1, compared to the VTSAX initial investment requirement of $3000.
Our last pick is the Vanguard utility ETF. The VPU is a sector ETF, which we like because depending on the sentiments of a sector, sector ETFs can react differently to others. Currently, the VPU stands at $130 per share and is made up of 68 utility companies.
These are companies that distribute water, electricity, gas, etc. Now VPU is great because to buy into a mutual fund equivalent you would need a whopping $100,000, but to invest in the VPU you only need a minimum of $1.
We also like the VPU because the utility sector often has an inverse correlation to the market. Often when the stock market dips, the utility sector remains relatively unaffected. We also appreciate the dividend yield of the VPU, which is one of only two ETFs we hold that have a dividend yield of over 3%.
So that’s our ETF portfolio, including all the ETFs we use that have helped us to achieve financial independence. But good options aren’t limited to these - you can build an ETF portfolio around basically anything that you want!
However I do think it’s important to do further research because the options that work best for us won’t necessarily work best for you. Just stick to your financial goals and tailor your investments toward that, as this will help you on the path to financial independence.