Be careful buying an ETF based on its past performance, because the future could be as unpredictable as the weather. Instead, consider integrating ETFs into a diversified portfolio, keeping in mind that asset allocation is the top driver of a portfolio’s performance. Find a balance of stock and bond ETFs that’s right for you, and spread your money across U.S. and international ETFs to diversify even more. Then look for low-cost ETFs so you’re not giving up performance to high expense ratios.
A common question we get is: “What’s the best-performing ETF, or ‘exchange-traded fund’?”
It’s tempting to pull up a list of ETFs and look at performance figures for the last few months or years. The thing is, historical performance tells you how an ETF did perform; it doesn’t tell you how it will perform.
It’s like the weather. You can look up what the average temperature has been historically for a certain date—say, next Saturday—but what will actually happen when the weekend comes? Will it be colder or warmer than average? By a little or a lot?
You can’t always use past temperatures to predict how hot or cold it will be—just like you can’t always use the past performance of an ETF to predict whether that ETF will make or lose money.
Since you can’t predict the future—while keeping your goals in mind, try asking, “How do I choose the best ETFs for me?”
To make that decision, try not to focus on the performance of individual ETFs. Instead, consider how you’ll integrate ETFs into a diversified portfolio. Diversification is the key to balancing how much risk you’re willing to take with your money in exchange for the potential reward of seeing that money grow.
And asset allocation is, by far, the most important aspect of diversification. That means choosing a combination of stocks and bonds to help balance the risks that come with each type of investment.
Then you can further diversify by holding a wide variety of stocks and bonds. That way, when one isn’t doing so well, the others might help pick up the slack.
Just like mutual funds, ETFs have this type of diversification built in, with tens, hundreds, or even thousands of stocks or bonds in a single ETF.
Next, consider spreading your money across U.S. and international investments.
If you’re considering a sector ETF, just be careful. When you only invest in a single industry—such as energy or health care—if something goes wrong in that sector, your portfolio could take a big hit.
Finally, remember: No matter how well-diversified you are, high costs can eat away at your portfolio’s performance. So be sure to compare expense ratios across similar ETFs to make sure that every possible dollar stays in your account, working for you.
For help creating a well-diversified, low-cost portfolio, visit vanguard.com/etfchoices.
You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free) or through another broker (which may charge commissions). See the Vanguard Brokerage Services commission and fee schedules at investor.vanguard.com for limits. Vanguard ETF Shares are not redeemable directly with the issuing fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. Fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Investments in securities issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks can be especially high in emerging markets. Sector ETFs are subject to sector risks and nondiversification risks, which may result in performance fluctuations that are more extreme than fluctuations in the overall stock market. Bond ETFs are subject to interest rate, inflation, and credit risk.
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