World Stock Watch

Building a Lifetime of Passive Income with Vanguard ETFs

Achieving financial independence requires a steady stream of income without the need for active involvement. For many investors, the ultimate goal is to build a portfolio that generates enough passive income to cover living expenses indefinitely. Vanguard exchange-traded funds (ETFs) offer a powerful combination of broad diversification and rock-bottom fees, making them ideal vehicles for long-term wealth-building and income generation.

The Power of Passive Management

Vanguard’s approach to investing, pioneered by John Bogle, emphasizes low-cost, passive strategies that have revolutionized the investment landscape. By closely tracking their underlying indexes, Vanguard ETFs maximize efficiency while maintaining simplicity for individual investors. This approach has resulted in a range of benefits, including lower turnover rates, reduced tax liabilities, and impressive dividend growth rates.

Three Vanguard ETFs for Lifetime Passive Income

We’ll explore three Vanguard ETFs that have the potential to provide lifetime passive income, each offering a unique approach to dividend investing.

• Vanguard S&P 500 ETF (VOO): This ETF mirrors the performance of the benchmark S&P 500 index, encompassing 500 of the largest U.S. companies. With an ultra-low expense ratio of 0.03%, this ETF allows investors to retain more of their returns.
• Vanguard Total Stock Market Index Fund ETF Shares (VTI): This ETF offers investors broad exposure to the entire U.S. stock market, encompassing small-, mid-, and large-cap stocks. Matching its S&P 500 counterpart, it sports a minimal expense ratio of 0.03%, maximizing investor returns.
• Vanguard High Dividend Yield Index Fund ETF Shares (VYM): This ETF targets stocks with above-average dividend yields, resulting in a higher 30-day SEC yield of 2.65%. While its expense ratio is slightly higher at 0.06%, it remains remarkably low compared to actively managed funds.

A Closer Look at Performance

All three ETFs benefit from Vanguard’s passive management approach, which closely tracks their respective indexes. This hands-off approach simplifies investing for individuals seeking passive income. The low turnover rates of these ETFs further enhance their tax efficiency.

Since their inception, these ETFs have demonstrated impressive growth potential:

• A $10,000 investment in the Vanguard S&P 500 ETF at its launch, with dividends reinvested and assuming no tax liabilities, would have grown to $69,250 today.
• A $10,000 investment in the Vanguard Total Stock Market Index Fund ETF Shares at its launch, with dividends reinvested and assuming no tax liabilities, would have blossomed to $76,590 today.
• A $10,000 investment in the Vanguard High Dividend Yield Index Fund ETF Shares at its launch, with dividends reinvested and assuming no tax liabilities, would have grown to $45,750 today.

These Vanguard ETFs showcase the potential for growing passive income over time. Their broad diversification, ultra-low fees, and passive management approach set them apart in the ETF landscape.