The beauty of starting to invest when you're in your 20s is that your money might be able to compound for somewhere in the neighborhood of 40 to 50 years before you need to spend it. With that kind of timeline, regularly investing even a small amount can turn into a substantial nest egg by retirement.
One of the best ways to put that time on your side is to invest in low-cost, growth-focused ETFs. By investing in ETFs instead of individual stocks, you get some measure of instant diversification, which helps protect your overall portfolio from the failure of any one company in it. By looking for ones with low costs, you'll do a better job of assuring you get more of the returns that the underlying companies generate. With that in mind, if you're investing in your 20s, here are three ETFs to watch.
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1. The ETF that should beat most professionally managed funds
Over time, most professionally managed mutual funds fail to keep up with relevant market benchmarks. That makes investing in the Vanguard S&P 500 ETF (VOO -0.29%) a great option for a 20-something investor looking for an easy way to get market-type returns over time. The Vanguard S&P 500 ETF tracks the S&P 500 index as its benchmark, with only a very small 0.03% expense ratio separating investors from matching that benchmark's long-term performance.
Unless you believe professionally managed funds will suddenly make a sustained resurgence, investing in a low-cost, broad market tracker like that is a great way to build wealth over time. Just recognize that as with any growth-oriented investment, there's a chance you will lose money, especially in the short term, as the market doesn't always go up.
2. A more tech-heavy index tracker that may grow faster
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The S&P 500 is a very well-known index that tracks a broad swath of the market. While that has been a great investment over time, it also has its fair share of older slow-growth companies in it. If you're looking for faster growth potential, consider the Invesco QQQ Trust (QQQ -0.06%), an index ETF based on the Nasdaq 100.
The Nasdaq 100 tracks 100 of the largest non-financial companies that trade on the Nasdaq stock exchange. That tends to weight the holdings toward technology-oriented businesses, which provides the framework for faster potential growth (and thus possibly higher returns) over time. The downside, however, is that when tech falls out of favor, this ETF's value can decline substantially. As a result, it's only appropriate to consider for money you're not expecting to need for a long time.
3. An out-of-favor industry that could rebound once COVID-19 is controlled
One of the advantages of investing in your 20s is that you have plenty of time to wait for industries to recover if they're out of favor for one reason or another. Real estate -- particularly commercial real estate -- has been greatly affected by the COVID-19 pandemic. Once people become comfortable leaving their homes and immediate neighborhoods again, that's an industry that has the potential to benefit.
After all, if you head back to the office -- that's commercial real estate. If you take a vacation, chances are that involves commercial real estate. If you start shopping for more than the essentials again; yup, you guessed it -- more commercial real estate. Same with restaurants, bars, movie theaters, gyms, and all those other activities that were part of our typical lives before the coronavirus pandemic.
With that in mind, the Vanguard Real Estate ETF (VNQ -1.61%) is certainly worth considering as an investment for someone with the patience to wait for real estate to recover. This ETF tracks the MSCI US Investable Market Real Estate 25/50 Index. That index covers a very broad spectrum of the Real Estate industry. The broad scope gives you the opportunity to participate in the recovery even if you don't know in advance who those winners in the post-COVID-19 world will be.
You can start now for an incredible head start on your future
Index-tracking investments like these three ETFs are a great way to build a foundation for a portfolio that can help you on your path to your long-term financial goals. Once that foundation is in place, if you want to branch out to more aggressive investing approaches such as individual stocks or options, you can certainly do so.
Just recognize that focusing on individual companies means that if that company fails, you'll feel it in your portfolio more than if your only exposure to that company were as part of a diversified index ETF. That's why it's important to lay that broader foundation first. Start there in your 20s, test and learn what else may work for you, and grow your nest egg from there. By starting with indexing, you give yourself a good chance of winding up successful, even if your initial individual stock picks end up not working out.
Chuck Saletta has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Vanguard REIT ETF. The Motley Fool owns shares of Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
