Vault’s Viewpoint on Investing in One ETF
- ETFs offer portfolio diversification, but not every investor needs multiple ETFs.
- A single ETF can move you closer to your financial goals and can complement a portfolio of individual stocks.
- Knowing your long-term goals and what you need now can help you decide on the right ETF and stocks for your portfolio.
1. The ETF Is Well Diversified (VUG)
Investing in VUG instantly gives me exposure to 199 stocks. It’s a level of diversification that’s hard to achieve by picking individual stocks. While I can buy 199 stocks, it’s very difficult to stay on top of each pick. Simplicity is one of the main attractions of ETFs in general.
Buying another ETF will add more diversification to my portfolio. However, VUG has plenty of diversification. It’s also important to consider what type of diversification you want, as some portfolio diversification is better than others.
For instance, VUG only allocates 0.20% of its capital toward utilities. That’s not much, and I am perfectly fine with that. The iShares S&P 500 Utilities Sector ETF gives investors exposure to utilities that are less risky than growth stocks. This fund, IUUS, only has a 7.45% annualized return over the past five years. That’s less than VUG’s historical returns.
VUG offers great portfolio diversification without much exposure to sectors known to lag the market during bull runs.
2. Historical Returns Have Been Consistently Good
If I had to buy a new ETF, I would compare the historical returns of a few top funds. Knowing the historical returns can help you gauge if the returns are consistent or if the fund endures peaks and valleys like the ARK Innovation ETF.
VUG has generated steady returns over the long run and has an impressive history. VUG has an annualized 16.27% return over the past 15 years. Furthermore, the annualized return has been 17.37% over the past five years.
That’s a much higher return than what you’ll get from the bank or most ETFs. VUG’s 5-year and 15-year annualized returns are higher than the popular SPY ETF.
Compounded returns are a powerful force, and a good ETF can move you closer to your long-term goals. If you invested $10,000 into VUG 15 years ago with its 16.27% annualized return, you would now have $95,943.40.
Most compounding calculations follow the assumption of an annualized 8% return over a lengthy amount of time; However, with an ETF that has historical returns higher than 8%, your money compounds faster. I like sticking with a winning ETF instead of getting fancy and buying shares in multiple ETFs.
3. I Am Focused On Growth
Younger investors have lengthier time horizons and don’t need dividend income anytime soon. Dividend income can hinder total returns since it gets taxed, and corporations aren’t reinvesting that money into their companies.
While dividends can attract plenty of investors and act as an extra source of income, not every investor needs them right away. I am one of the investors in this camp, so I am focused on a growth ETF instead of an income ETF.
4. I Also Own Individual Stocks
The VUG ETF offers exposure to many stocks with a large focus on the tech industry. More than half of its total assets are in technology, with the remaining capital spread across other sectors.
I like the focus on tech, as many corporations in this sector have outperformed the S&P 500. Investors can see the fruits of this sector by looking at the Magnificent Seven stocks. However, I don’t only own the VUG ETF. I also buy individual stocks, which allows me to customize my portfolio to pursue certain industries.
Buying individual stocks allows me to add more emphasis to specific sectors and industries. My portfolio has roughly 15 stocks in it. Most of these companies are chipmakers or cloud computing leaders. Getting additional exposure to individual stocks allows me to construct a portfolio that doesn’t revolve around multiple ETFs.
5. Most ETFs Have Similar Portfolios
VUG, SPY, and QQQ all have the same top five holdings in the same order. There’s also some overlap with the Top 6-10 holdings. I don’t feel the need to invest in VUG, SPY, and QQQ. Many growth funds follow the same playbook and allocate most of their funds to the Magnificent Seven stocks.
Some funds must focus on those stocks if they weigh positions based on their market caps. VUG, SPY, and QQQ each have Microsoft as the top holding because it has the highest market cap.
If you dig deeper into multiple ETFs, you will see a lot of overlap. Then, it’s a matter of looking at historical returns and the portfolio’s current holdings. Most portfolios allocate a large percentage of their capital into the Top 10 holdings.
6. Keeping My Portfolio Simple
Only holding onto one ETF allows me to keep my portfolio simple. I don’t want to check in on it throughout the day. Putting capital into an ETF allows me to feel assured that it’s running smoothly.
I primarily use Vanguard for the ETF and Fidelity for my individual stocks. I check Fidelity more often but can go multiple weeks without checking my Vanguard account. You have to do plenty of research and enjoy that process if you want to buy individual stocks.
Most people may benefit more from focusing on a single ETF rather than loading up on stocks. If you buy individual stocks and have an ETF, you don’t need many individual stocks. If you have more than 20 stocks in your portfolio, it’s practically a glorified ETF at that point where you are the fund manager.
7. The Highest Returns Come from Career Growth
Any investor will welcome positive, compounding returns for their portfolios; However, some investors can be lured by risky investment opportunities that have a low chance of generating high returns. The possibility of a shortcut to long-term financial goals can lead to substantial losses once investors learn that most shortcuts aren’t as they seem.
While many investments fit this risky category, few can compete with 0 DTE options. These options can generate seismic wealth in a few hours if a stock moves sharply in your preferred direction. However, most of these same options expire worthless and have wiped out entire portfolios.
The best alternative is to focus on career growth. Develop new skills, offer a high-value service, and build your pipeline. If you focus on income growth over portfolio growth, you won’t get lured by a company that is pitched as “The Next Amazon” or “The Next Apple.”
Increasing your monthly portfolio contribution can make you less susceptible to risky investments. Contributing $5,000 per month instead of $500 each month can make your long-term financial goals feel more realistic.
Not everyone can contribute $5,000 per month, but investors should ask themselves how they can build their careers to support a $5,000 monthly portfolio contribution. Once you reach that level, you can set more ambitious goals. To me, growing my income is more valuable than chasing high returns. That’s why I only have a single ETF and a few individual stocks I don’t have to stay on top of every day.
Frequently Asked Questions
Is it okay to buy just one ETF?
It is okay to buy just one ETF. These funds offer instant portfolio diversification, and some of them have more than 100 holdings. However, you should check if the fund is truly diversified or if it prioritizes one sector. For instance, SOXX is a top-performing fund with 35 holdings, but all of those stocks are in the semiconductor industry.
Are single-stock ETFs a good idea?
Single-stock ETFs do not offer any diversification, and they are leveraged positions on an asset. These funds are more volatile and may help day traders and swing traders. However, single-stock ETFs aren’t good for long-term investors due to the risks and high expense ratios.
How much does one ETF cost?
Investors can find the cost of an ETF by looking at the expense ratio. Investing $10,000 into a fund with a 0.10% expense ratio will cost $10 for the year. ETF costs get taken out of the share price and change each year due to how the fund’s value changes over time.
