Best Long-Term ETFs to Buy and Hold

Understanding Long-Term Growth ETFs

Exchange-traded funds (ETFs) have become increasingly popular among investors for their flexibility, diversification, and cost-effectiveness.

Growth ETFs, in particular, are designed to focus on stocks of companies that exhibit potential for above-average growth. These companies may be characterized by rapid revenue increases, innovative products or services, and the potential to disrupt existing markets.

Unlike value ETFs, which focus on undervalued stocks with strong fundamentals, growth ETFs aim to capture gains from the appreciation of the stock prices of these high-growth companies.

Top Factors to Consider When Choosing a Growth ETF

Selecting the right growth ETF can be a crucial decision for investors aiming to build wealth over the long term. Here are the top factors to consider when choosing a growth ETF:

1. Underlying Index:

The underlying index of an ETF determines the selection criteria and weighting of the stocks within the fund. Investors should research the index to understand the criteria for selecting growth stocks.

Popular indices for growth ETFs include the S&P 500 Growth Index and the NASDAQ-100 Index. Knowing the index will help investors understand the ETF’s exposure and characteristics.

2. Expense Ratio:

The expense ratio is the annual fee that all ETF shareholders pay to cover the fund’s expenses. A lower expense ratio means higher net returns for investors.

While growth ETFs generally have lower expense ratios than actively managed funds, but these fees can still vary significantly among ETFs. Evaluating the expense ratio is crucial as it directly impacts the overall returns of the investment.

3. Performance History:

Reviewing an ETF’s historical performance provides insights into how the fund has performed across different market conditions.

Investors should compare the growth ETF’s performance against its benchmark index and peer funds. While past performance does not guarantee future results, consistent historical outperformance can indicate a well-managed ETF.

4. Liquidity and Trading Volume:

Liquidity is an important consideration for ETFs, as it affects the ease with which investors can buy or sell shares without significantly impacting the market price.

ETFs with high daily trading volumes and narrow bid-ask spreads are generally more liquid, making them more suitable for investors. Low liquidity can lead to higher trading costs and increased volatility.

5. Sector Allocation:

Growth ETFs can have varying levels of exposure to different sectors. Investors should analyze the sector allocation to ensure it aligns with their views and investment strategy. For instance, if an investor is optimistic about the technology sector’s growth potential, they might prefer a growth ETF with significant technology exposure.

6. Holdings and Diversification:

A well-diversified growth ETF will spread its investments across a broad range of growth stocks, reducing the impact of poor performance by any single stock. Reviewing the top holdings and their weightings can provide insights into the ETF’s concentration risk.

7. Dividends and Capital Gains Distribution:

While growth ETFs are generally not focused on dividends, some may still provide modest dividend yields. Investors seeking some income in addition to capital appreciation should check the ETF’s dividend policy. Additionally, understanding the fund’s capital gains distribution history can help investors anticipate potential tax liabilities.

8. Fund Size and Asset Under Management (AUM):

The size of the ETF, indicated by its AUM, can be a sign of its popularity and stability. Larger funds generally have more liquidity and lower bid-ask spreads, making them more cost-effective for trading. However, smaller, niche growth ETFs can provide exposure to specific markets or strategies that might not be available in larger funds.

9. Fund Manager’s Reputation:

The fund manager’s experience and reputation can impact the ETF’s success. ETFs managed by reputable firms with a proven track record in managing growth-oriented funds are more likely to perform consistently. Researching the fund manager’s experience, approach, and other funds managed can provide confidence in the ETF’s management.

Best ETFs for Long-Term Growth

1. iShares Core S&P 500 ETF (IVV):

The iShares Core S&P 500 ETF (IVV) is a go-to choice for foundational portfolio growth. It tracks the S&P 500 Index, representing the 500 largest U.S. companies across sectors like technology, healthcare, and finance.

• Why It’s Essential: IVV’s strength lies in diversification. With one investment, you gain exposure to some of the most stable and innovative companies in the U.S., such as Apple, Microsoft, and Amazon.
• Low Costs and High Liquidity: A 0.03% expense ratio ensures fees don’t erode your returns, and the $530 billion asset base guarantees easy buying and selling.
• Growth Potential: While not focused solely on growth, its balanced mix of established companies offers steady, long-term capital appreciation.

2. Vanguard Growth ETF (VUG):

The Vanguard Growth ETF is tailored for investors seeking exposure to companies with high growth trajectories, particularly in sectors like technology, healthcare, and consumer discretionary.

• Growth-Centric Strategy: VUG targets large-cap stocks with strong earnings growth potential, including companies like Tesla and Meta Platforms.
• Why It Stands Out: The ETF has $145 billion in assets and focuses on firms reinvesting profits into innovation and expansion, setting the stage for substantial long-term returns.
• Potential Drawbacks: This ETF’s focus on growth stocks makes it more susceptible to market volatility, especially during economic downturns.

3. Schwab U.S. Large-Cap Growth ETF (SCHG):

SCHG provides another excellent option for large-cap growth exposure with a similar sector focus to VUG but at a slightly lower expense ratio.

• Key Advantages: The 0.03% expense ratio and $90 billion asset base make it a highly cost-effective choice for investors.
• Sector Insights: With significant weightings in technology and healthcare, SCHG is ideal for those looking to benefit from sectoral innovation.
• What to Expect: While offering lower expenses, its returns are closely tied to broader economic conditions and technological advancements.

4. Vanguard Total International Stock ETF (VXUS):

VXUS offers global exposure, providing access to companies in Europe, Asia, and emerging markets like China and India.

• Diverse Holdings: With over $320 billion in assets, VXUS includes stocks from both developed and emerging economies, offering varied growth opportunities.
• Why It’s Valuable: Diversifying internationally can reduce risk and tap into regions experiencing faster economic growth than the U.S.
• Risks to Consider: Factors like currency fluctuations, political instability, and regulatory changes in international markets can impact returns.

5. Invesco QQQ Trust (QQQ):

QQQ is a standout ETF for technology enthusiasts, focusing on the Nasdaq-100 Index, which includes companies like Nvidia, Alphabet, and Adobe.

• High Growth Potential: With $230 billion in assets, QQQ benefits from being heavily weighted toward the tech sector, which drives global innovation.
• What Makes It Unique: This ETF is ideal for capturing trends in artificial intelligence, cloud computing, and other disruptive technologies.
• Considerations: At 0.20%, the expense ratio is higher, but its historical performance often justifies the cost for long-term investors.

6. Schwab U.S. Small-Cap ETF (SCHA):

SCHA focuses on small-cap U.S. companies, which are often growth-stage businesses with significant upside potential.

• Growth Opportunities: Small-cap stocks historically outperform large caps during economic expansions, making SCHA a valuable addition.
• Cost and Liquidity: With a 0.04% expense ratio and $130 billion in assets, it’s an affordable way to access the growth potential of smaller firms.
• What to Watch: Small caps are more volatile and sensitive to interest rate changes and economic slowdowns.

7. Vanguard Dividend Appreciation ETF (VIG):

VIG focuses on companies with a consistent track record of increasing dividends, which can signal strong financial health.

• Why It’s Great for Long-Term Growth: Companies that grow their dividends typically reinvest in their operations, leading to steady growth.
• Assets and Cost: With $110 billion in assets and a 0.06% expense ratio, VIG provides stability alongside growth potential.
• Limitations: While it offers growth, its returns may lag behind more aggressive, non-dividend-focused growth ETFs.

8. iShares Core U.S. Aggregate Bond ETF (AGG):

AGG provides diversification through bonds, a critical stabilizer in portfolios during volatile market periods.

• Why Include Bonds: Bonds generate steady income and can offset stock market fluctuations, ensuring smoother returns over time.
• Low Cost, High Assets: With a 0.03% expense ratio and $570 billion in assets, AGG is one of the most reliable bond ETFs.
• Returns Context: Bonds generally deliver lower returns compared to stocks, making them a complementary investment rather than a primary growth driver.

ETF Investment Strategies for Long-Term Growth

1. Buy and Hold Strategy:

The buy and hold strategy benefits from compound growth, as returns generate additional returns over time. Additionally, it reduces transaction costs and capital gains taxes associated with frequent trading.

2. Dollar-Cost Averaging:

Dollar-cost averaging involves investing a fixed amount of money into an ETF at regular intervals, regardless of its price. This strategy helps reduce the impact of volatility by averaging out the purchase price. It also eliminates the need for market timing, as investors are investing consistently regardless of market conditions.

3. Rebalancing Your Portfolio:

Rebalancing involves periodically adjusting your portfolio to maintain your desired asset allocation. This strategy helps manage risk by preventing any single asset class from becoming too dominant. Additionally, rebalancing can help capture gains from outperforming assets and reinvest them in underperforming areas, preserving growth potential.

4. Combining Growth ETFs with Other Investments:

Diversifying your portfolio by combining growth ETFs with other types of investments can enhance overall performance. Incorporating dividend-paying ETFs or bonds can also generate additional income streams, balancing the growth focus of ETFs. A well-diversified portfolio helps manage volatility and reduce the impact of poor performance in any asset class.

Tax Considerations for Long-Term Growth ETFs

Investing in long-term growth ETFs can have several tax implications.

Profits from ETFs are subject to capital gains taxes, with long-term capital gains rates generally lower than short-term rates if the ETFs are held for over a year. Dividends, while less common in growth ETFs, are also taxable. They may be qualified or non-qualified, with different tax treatments.

Some ETFs are designed to be tax-efficient, minimizing distributions and capital gains, which can help reduce your tax burden. Additionally, tax-loss harvesting, which involves selling ETFs at a loss to offset gains, can be a strategy to manage taxable income. However, this should be done carefully in alignment with your overall investment strategy.

Read also: How to Invest in ETFs: A Beginner’s Guide

Conclusion

Long-term growth ETFs are an excellent choice for investors aiming to build wealth over time through capital appreciation. Additionally, combining the best growth ETFs with other investments can further diversify and stabilize your portfolio. Understanding tax implications and implementing tax-efficient strategies are also important for optimizing returns. Considering these factors, investors can develop a robust plan to achieve long-term financial goals and fully leverage the best ETF for long-term growth.

Frequently Asked Questions

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Always do your own research and consult with a professional before making any investment decisions. Stock investments involve risk, and you should only invest what you can afford to lose.