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

Vanguard offers a variety of low-cost exchange-traded funds (ETFs) for equities, bonds, asset blends, and more. ETFs can be a simple and straightforward way to achieve diversification and invest in a way that suits your financial planning objectives.

Here's why the Vanguard Value ETF (NYSEMKT: VTV) , Vanguard Mega Cap Value ETF (NYSEMKT: MGV) , and Vanguard High Dividend Yield ETF (NYSEMKT: VYM) stand out as three top funds to buy now for folks looking to generate passive income.

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Vanguard Value ETF

With $261 billion in net assets, the Vanguard Value ETF is one of the largest low-cost value-focused ETFs. The fund targets large-cap value stocks through 336 holdings, many of which pay dividends.

If you follow Vanguard funds, you may know about the Vanguard Growth ETF (NYSEMKT: VUG) . The Value ETF and Growth ETF are two sides of the same coin, with the Growth ETF focusing less on valuation and dividends and more on earnings growth. Here's a look at the top 10 holdings in the Value ETF.

Data source: Vanguard.

Right off the bat, you'll notice that the fund does not hold well-known mega-cap growth stocks like Apple , Microsoft , Nvidia , Alphabet , Amazon , Meta Platforms , or Tesla -- which are all top holdings in the Vanguard Growth ETF. The Value ETF's top 10 holdings make up just 21.3% of the fund, in stark contrast to the top-heavy Growth ETF, which has a whopping 59% concentration in just 10 stocks. Even the Vanguard S&P 500 ETF has only 36% of its holdings in its top 10 names.

Even without the help from top growth stocks, the Vanguard Value ETF has put up an impressive 21.1% year-to-date return, just barely lagging the 24.3% total return of the S&P 500 . The strong performance goes to show that top value companies aren't just income plays. In fact, many value stocks have been hitting all-time highs .

With a mere 0.04% expense ratio, or just $4 for every $10,000 invested, a price-to-earnings ratio (P/E) of 19.9, and a dividend yield of 2.3%, the Vanguard Value ETF offers a way to invest in industry-leading companies while avoiding growth stocks that are premium priced with low dividend yields.

Vanguard Mega Cap Value ETF

The Vanguard Mega Cap Value ETF is a concentrated version of the Value ETF with a slightly higher fee at a 0.07% expense ratio. With 136 holdings, the fund basically takes the largest companies in the Value ETF and leaves out the other 200 holdings. Its top 10 holdings are the same names in the Value ETF but with a 26.5% collective weighting instead of 21.3%.

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.

Vanguard High Dividend Yield ETF

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.

^SPX data by YCharts.

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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