3 Vanguard Exchange-Traded Funds (ETFs) to Buy Hand Over Fist and 1 to Avoid

Exchange-traded funds (ETFs) are one of the best ways investors can build wealth. These funds are a lot like mutual funds with a key difference: You can trade them on the open market just like a stock. You get diversification, liquidity, and simplicity all at once.

Some ETFs are passive and simply track an underlying index, while others are actively managed, with their assets bought and sold daily at the discretion of the fund manager.

One of the most successful and largest fund managers is Vanguard, which offers 86 ETFs that hold $2.8 trillion in assets. That's a lot of money. They're so big, in large part, because they have a proven track record.

Another reason? They are the cheapest of any of the big managers. Investment managers charge a small percentage of the value of your investment as a fee, known as the fund's expense ratio. Vanguard's average is just 0.05%. So if you have $1,000 invested with them, they only charge $0.50. That's tiny, yes, but it means the company makes $1.4 billion in fees on the $2.8 trillion it manages.

Let's look at the three ETFs I think are the best buys right now and one you'll want to avoid.

For starters, stick with a tried-and-true broad market option

The Vanguard Total Stock Market ETF (NYSEMKT:VTI) invests in exactly what the name implies: a huge swath of U.S.-listed companies of all sizes spanning all kinds of industries.

Maybe that sounds boring to you. It should. Boring more often than not is something to celebrate when building wealth. As smart as many investors like to think they are, the truth is, they rarely beat the market over the long haul.

The Total Stock Market ETF has returned more than 17% since the beginning of 2024; over the last five years, it delivered an average annual return of nearly 15%. Those are excellent returns. Yes, you can beat that with more-targeted approaches, but you can also lose your lunch. This fund offers a set-it-and-forget-it approach at a dirt cheap price (its expense ratio is just 0.03%).

There's another reason to snag this ETF and one that is more timely. Rate cuts from the Federal Reserve are likely in the near future, and this is often associated with money flowing into small-cap and mid-cap stocks from big caps. Some of this already happened when the Fed indicated it would start cutting rates, and I think it's likely to continue.

Although the Total Stock Market ETF isn't particularly heavily weighted toward small and medium-size companies, it still offers more exposure than other popular broad market funds that are focused on the S&P 500.

A more-targeted exposure to small and medium companies

Rate cuts from the Federal Reserve are likely in the near future, and this is often associated with money flowing into small-cap and mid-cap stocks from big caps.

Some of this already happened when the Fed indicated it would start cutting rates, and I think it's likely to continue. Although the Total Stock Market ETF isn't particularly heavily weighted toward small and medium-size companies, it still offers more exposure than other popular broad market funds that are focused on the S&P 500.

If you buy the thesis that small and midsize companies are about to have their moment, Vanguard has a couple of options for you: the Vanguard Mid-Cap ETF (NYSEMKT:VO) and Vanguard Small-Cap ETF (NYSEMKT:VB). Once again, these provide exactly what you think: exposure to mid-cap and small-cap stocks.

Vanguard's mid-cap offering has a five-year annualized return of 10.5%, while its small-cap ETF delivered a 9.8% annualized return. These are solid returns, no doubt, but I think they can outperform this in the coming years as rates come down.

Real estate in China and Japan is not where you want to be right now

The Vanguard Global ex-U.S. Real Estate ETF (NASDAQ:VNQI) invests in the real estate industry outside of the U.S., with much of it focused in Asia. This is a problem. To say that the Chinese real estate market is struggling might be putting it lightly. China overbuilt and now faces a market where there is too much supply and not enough demand.

According to Goldman Sachs, the total value of unsold real estate in China is over $4 trillion. Developers across the country are on the verge of collapsing, if they haven't already.

The picture isn't too different in Japan, though for slightly different reasons. Where the Chinese crisis was fueled largely by the government pumping money into the market, Japan's woes come from a steeply falling birth rate. The effect is the same.

Vanguard's ETF invests all over the world, but given that these are two major markets and Japanese and Chinese companies are both in the top 10 largest holdings in the fund, I would avoid it at all costs today.

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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Index Funds-Vanguard Mid-Cap ETF, Vanguard Index Funds-Vanguard Small-Cap ETF, and Vanguard Index Funds-Vanguard Total Stock Market ETF. The Motley Fool has a disclosure policy.