Invest In Your Grandkids: Buy These 3 Stocks for Their 529 Plans

Many baby boomers who are avidly focused on investing for their own retirement may also be looking to invest for their loved ones. Whether that’s in the form of passing down some of their wealth at some day to their heirs (which means the better they do, the better their kids and grandkids will do), or simply adding funds to their loved one’s 529 college savings plans, there are plenty of ways to invest in future generations. 

Personally, I’m a fan of 529 savings plans, due to the fact that there are explicit state tax-related benefits to investing in children’s education. So, if you live in a state which has an income tax, and are looking to not only save for today (but for the future), this is an excellent vehicle to choose.

Now, of course, the question for those willing to put some capital to work for the next generation becomes – which stocks to include in such plans? Here would be my three top picks for those looking to do so right now. 

Vanguard Total Stock Market Index ETF (VTI)

One of the most important portfolio allocation decisions for long-term investors looking for some semblance of stability in terms of the expected up-and-to-the-right moves a portfolio should make over the long-term is diversification. The good news about most ETFs is that they provide the kind of low-cost diversification investors are after. 

That said, the sheer number of stocks held in the Vanguard Total Stock Market Index ETF (VTI) is remarkable. In my view, this is the absolute best long-term fund for those with multiple decades to sit and watch their investments grow, given the thousands of holdings spanning the high-quality U.S. market VTI provides exposure to. 

What’s even more impressive is this fund’s expense ratio of just 0.03% – the cheapest I’ve ever seen in this sector. For those with such a long-term time horizon, focusing on fees (even if they’re just basis points apart) can make a material difference. In this regard, I think VTI can play a solid role as a core portfolio holding for most 529 plans. That’s how I look at these funds, at least. 

Vanguard Growth ETF (VUG)

For portfolios with very long time horizons, such as 529 plans, having a greater percentage of growth stocks stashed away to benefit from new technological trends and innovation can really pay off. Picking individual stocks in the “growthier” areas of the market can be disastrous – it only takes a few to go to zero in order to wipe away a significant portion of one’s gains from other big winners. 

But by buying a basket of high-quality growth stocks via an exchange traded fund such as the Vanguard Growth ETF (VUG), investors can get all the upside of U.S. growth stocks at a reasonable expense ratio of just 0.04%. Focusing on technology, consumer discretionary, and communication services stocks primarily, this fund provides the kind of exposure many long-duration investors are after. Notably, this ETF doesn’t just focus on the Magnificent 7 or other mega-cap growth stocks – there are a smattering of mid-cap stocks included as well.

That provides a much more robust growth profile over the long-term, particularly for those who think we’ll eventually see a broadening out of the trade around growth stocks. 

For those who expect to see earnings growth pick up for companies at the forefront of economic growth, I think investing in a fund like VUG for one’s children or grandchildren certainly makes senses. 

Vanguard Russell 1000 Growth ETF (VONG)

Sticking with the U.S.-oriented growth investing strategy, the Vanguard Russell 1000 Growth ETF (VONG) is another excellent option for those seeking more small- and mid-cap names in their growth buckets. 

For younger investors, I’d suggest that having ample exposure to such areas of the economy is probably a good idea. That’s because small and mid-cap growth stocks historically provide much higher returns than their large- and mega-cap counterparts. While that may not have necessarily been the case over the course of the past decade or so, I do think we’ll return to a state of “normal” at some point in the future. 

Tracking the Russell 1000 Growth Index, which includes a thousand of the top growth stocks in the market, there’s still plenty of exposure to large-cap names in this ETF as well. That said, with faster revenue and earnings growth, there is increased sensitivity to economic movements and performance particularly in the tech sector. That is to say, this ETF isn’t without risk, which many investors are well aware of.

The reality is though – without this higher level of risk, higher expected long-term returns aren’t possible. I think for those with at least two decades of runway moving forward, this is an ETF that’s worth considering at its 0.07% expense ratio.