3 Low-Cost Vanguard ETFs to Buy for a Lifetime of Passive Income

Still, even with that high concentration, the fund is far less top-heavy than Vanguard’s growth-focused funds. For example, the Vanguard Mega Cap Growth ETF has a staggering 62.7% weighting in just 10 names.

The Mega Cap Value ETF’s holdings are spread nicely across a variety of sectors. Compared to the S&P 500, the fund puts less emphasis on communications and technology and more weighting in value-focused sectors like industrials, consumer staples, and energy. For example, 33.2% of the fund is in healthcare, consumer staples, and utilities. These sectors tend to be resistant to recessions and less dependent on economic cycles.

With a 20.8 P/E and a 2.3% yield, the fund has a valuation and passive-income profile similar to the Vanguard Value ETF — making it a great choice for investors who want more emphasis on the top industry-leading value companies rather than including hundreds of names they may not even recognize.

The Vanguard High Dividend Yield ETF has 537 holdings, an 18 P/E, a 2.8% dividend yield, and a 0.06% expense ratio. It is the third highest yielding equity-focused low-cost Vanguard ETF. The only two higher-yielding equity funds are sector ETFs: the Vanguard Energy ETF and the Vanguard Utilities ETF.

For investors looking for a nearly 3% yielding fund that is highly diversified and not focused on a single sector, the Vanguard High Dividend Yield ETF is far and away the best choice.

Unlike other income-focused ETFs, where passive income is the priority, capital gains have historically comprised a higher portion of the High Dividend Yield ETF’s total return than dividends. This fund is not investing in ultra-high-yield companies with limited growth prospects.

In fact, it has the same top 10 holdings as the Value ETF and Mega Cap Value ETF, except it swaps UnitedHealth and Berkshire Hathaway (which doesn’t pay a dividend) for Merck and Coca-Cola.

Over the last five years, all three of the ETFs featured above have lagged the S&P 500 — which makes sense because the S&P 500 has been driven heavily by top tech stocks. But these funds have still produced phenomenal returns for patient investors, nearly tripling their money from a total-return perspective over the last decade.

As you can see in the chart, the more-concentrated Mega Cap Growth ETF outpaced the Value ETF, which has outperformed the High Dividend Yield ETF.

When selecting an ETF to buy and hold over the long term, it’s best to go with the fund that best suits your risk tolerance and preferences. All three of the discussed ETFs can be excellent sources of passive income while also allowing participation in top value-focused companies.

Investors who want to bet on the biggest and best companies may prefer the Vanguard Mega Cap ETF, while others who seek more diversification and a higher yield might choose the Vanguard High Dividend Yield ETF.

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3 Low-Cost Vanguard ETFs to Buy for a Lifetime of Passive Income was originally published by The Motley Fool