As we continue into the new year, it’s the perfect opportunity to reevaluate your portfolio and consider adding some new investments.
Exchange-traded funds (ETFs) can be a smart option for many investors. They require very little effort to maintain and also add more diversification to your portfolio. Each ETF may contain hundreds or even thousands of stocks, which can limit your risk.
There are thousands of different ETFs to choose from, but there are a few different types of funds that you’ll thank yourself for buying by the end of 2022.
1. S&P 500 ETFs
An S&P 500 ETF tracks the S&P 500 index, which means it includes the same stocks as the index itself and aims to mirror its performance. The S&P 500 includes stocks from 500 of the largest and most stable companies in the U.S., making this ETF one of the strongest investments out there.
One of the biggest advantages of investing in an S&P 500 ETF is that your investments are very likely to earn positive average returns over the long run. All investments are subject to short-term volatility, and S&P 500 ETFs are no exception. Historically, though, the S&P 500 has recovered from every single downturn it’s ever faced.
This doesn’t mean your investments will earn positive returns every single year. Some years, you may see below-average returns or even losses, while other years, you’ll earn higher returns. Over time, though, those highs and lows should average out to a positive number.
2. Growth ETFs
A growth ETF includes stocks that are expected to earn above-average returns. This type of investment can potentially supercharge your earnings and help your portfolio grow even faster.
Growth ETFs can be on the riskier side because high-growth companies are often younger and more volatile. That said, most growth ETFs include stocks from corporate behemoths like Apple, Amazon, and Microsoft. While these companies are still growing, they’re also very strong and stable.
Before you invest in growth ETFs, it’s important to ensure you have a diversified portfolio. Many growth stocks are in the tech sector, and investing in stocks from only one or two industries can increase your risk.
For this reason, it’s best to have at least one broad-market fund (such as an S&P 500 ETF) in your portfolio, in addition to a growth ETF. This will help reduce your risk while maximizing your earnings.
3. Dividend ETFs
Some companies choose to pay a portion of their profits back to shareholders in the form of a dividend. A dividend ETF, then, is a fund that only includes dividend-paying stocks.
The best part about investing in dividend ETFs is that they can generate a source of passive income. You’ll earn a dividend payment each quarter or year for every share you own.
By buying more shares over time, you’ll increase your dividend payments. Depending on how many shares you own, you could potentially earn thousands of dollars per year in dividends.
Dividend ETFs can also make it more affordable to invest. When you receive dividends, you generally have the option to reinvest that money to buy more shares rather than cashing it out immediately. This is a smart way to grow your portfolio without having to pay more out of pocket.
ETFs can make investing easier, but choosing the right funds is critical. While the right investments will depend on your personal preferences and tolerance for risk, S&P 500 ETFs, growth ETFs, and dividend ETFs may be a good fit for your portfolio.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.