Want $1 Million in Retirement? 2 Low-Cost Index Funds to Buy Now and Hold for Decades.

There's beauty in simplicity. This is particularly true when it comes to investing. The strategy that's easier to understand and implement often outperforms the more complex approach.

If you'd like to simplify your retirement plan, read on. The following two exchange-traded funds (ETFs) can be the foundation of your long-term investment portfolio. Whether you'd like to build a nest egg of $1 million or more, these proven wealth-builders can help you achieve your financial goals.

A bedrock index fund

The Vanguard S&P 500 ETF (NYSEMKT: VOO) lies at the core of many astute investors' retirement portfolios. The exchange-traded fund is designed to track the S&P 500 index and gives people an easy and low-cost way to own a piece of 500 of the largest and most profitable companies in America.

The Vanguard S&P 500 ETF is broadly diversified across industries, such as technology, financials, and healthcare. It's market-cap weighted, so the biggest -- and often best -- companies have an outsized impact on returns. Apple, Microsoft, Nvidia, Berkshire Hathaway, and Eli Lilly count among the fund's largest holdings.

Moreover, Vanguard's fees are often among the lowest in the mutual fund industry. The Vanguard S&P 500 ETF has an expense ratio of 0.03%, which equates to just $0.30 per $1,000 invested per year.

These low fees are a big part of why famed investor Warren Buffett is a fan of S&P 500 index funds -- and Vanguard's offering, in particular. He believes that people who invest in ultra-low-cost S&P 500 index funds will achieve superior long-term results, compared to those who choose higher-fee alternatives.

The data supports Buffett's view. The S&P 500 has generated higher returns than over 90% of actively managed large-cap funds over the past two decades, according to data from S&P Global.

Smaller businesses, larger potential returns

If you'd like to add an additional growth element to your retirement accounts, consider the Schwab US Small-Cap ETF (NYSEMKT: SCHA). This fund can provide you with low-cost exposure to companies with significantly smaller market values than those in the S&P 500 -- and substantially more expansion potential.

The Schwab US Small-Cap ETF tracks the Dow Jones U.S. Small-Cap Total Stock Market index. The average market capitalization of its over 1,700 stock holdings is roughly $4 billion. That's in stark contrast to the median market cap of the stocks held by the Vanguard S&P 500 ETF, which checked in at over $200 billion at the end of January.

Interestingly, the valuations of the stocks held by the Schwab US Small-Cap ETF are currently quite attractive, relative to many larger companies. The fund's price-to-earnings (P/E) ratio of 15 is about 37% lower than the Vanguard S&P 500 ETF's P/E of 24. This discrepancy is due, in part, to the performance of megacap companies like the "Magnificent Seven," which have produced spectacular returns for investors in recent years. Yet buying the Schwab US Small-Cap ETF at a discount today could boost your returns in the coming years.

Better still, with an annual expense ratio of only 0.04%, this small-cap fund's fees are quite reasonable. Pairing the Schwab US Small-Cap ETF with the Vanguard S&P 500 ETF could thus provide you with a low-cost way to profit from a broader swath of the U.S. economy. Owning both funds would also add a greater element of diversification to your retirement investments, thereby lessening volatility and reducing your overall risk.

Should you invest $1,000 in Vanguard S&P 500 ETF right now?

Before you buy stock in Vanguard S&P 500 ETF, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Vanguard S&P 500 ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.

See the 10 stocks

*Stock Advisor returns as of February 26, 2024

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


More Related Articles

Info icon

This data feed is not available at this time.

Sign up for the TradeTalks newsletter to receive your weekly dose of trading news, trends and education. Delivered Wednesdays.