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The popularity of exchange-traded fund (ETFs) grows by the day. These baskets of stocks, bonds and other assets offer low costs, intraday tradability and plenty of diversification. They’re wide-scale investments at the push of a button. No wonder investors big and small, across the globe, have poured more than $4 trillion in assets into ETFs.
But with literally thousands of funds to choose from, how do you determine the top ETFs?
More than 2,000 funds trading in the U.S. alone cover everything from passive equity indexing to active commodity pools, providing a seemingly endless lineup of investor options. But the thing about that selection is that not every fund is gold — there are some losers, some middling funds barely worth their weight … and then there are a few outstanding funds that are worth the few dollars a year it costs to stay invested in them.
Today, I’m going to point you in the direction of the top 10 ETFs on the market today. These funds feature a mix of solid investment strategies and relatively (and sometimes absolutely) low expenses, allowing you to pocket more of your returns.
In no particular order, here are the “chosen” funds:
Prices and data are from the original InvestorPlace story published on July 27, 2017. Click on ticker-symbol links in each slide for current prices and more.
By Aaron Levitt
| July 2017
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Type: Large-cap stock
Expenses: 0.04%, or $4 annually on every $10,000 invested
The first exchange-traed fund was the SPDR S&P 500 ETF Trust (SPY), which was designed to track the market via the venerable S&P 500. And while the SPY is still a great fund, it’s not the top ETF to track the index.
That crown goes to the Vanguard S&P 500 ETF (VOO)
The VOO also tracks the S&P 500, providing access to U.S. blue chips including Apple Inc. (AAPL), Exxon Mobil Corporation (XOM) and Johnson & Johnson (JNJ). But a few differences make VOO a better buy.
One is its low expense ratio of just 4 basis points, which is less than the SPY’s 9.45 basis points. That difference might be small, but it essentially guarantees that the VOO will always outperform the SPDR product. Another difference is structural. SPY is actually a unit investment trust, and as a result must invest perfectly faithfully. However, the VOO can use derivatives and other strategies to eke out incremental gains, providing a bit more outperformance.
These attributes make VOO a clear choice for individual investors over SPY, and make it one of the top ETFs to buy for broad large-cap exposure.
Type: Large-cap stock (Equal-weighted)
Expenses: 0.2% (includes 20-basis-point fee waiver)
Another top ETF also tracks the S&P 500, but with a twist — one that can help enhance returns in rising markets.
Like the previously mentioned VOO, the Guggenheim S&P 500 Equal Weight ETF (RSP) tracks the S&P 500. However, rather than determining weight by market capitalization (size), the RSP equally weights all 500 constituents at every rebalancing. That means a company like Foot Locker, Inc. (FL) will have the same amount of influence over the fund as Apple.
The problem with cap-weighted ETFs like VOO is that giants like AAPL have too much pull on the underlying index, and create a bit more single-stock risk than you might want in a broad-market index. And when smaller, “growthier” companies run hot, that will matter much more in an equal-weighted fund than a cap-weighted fund.
Equal-weighting the S&P 500 has served investors well. Since inception in 2003, RSP has produced 11.2% returns — better than the S&P 500 over that same time. But a fair note: This ETF’s focus on smaller stocks does result in higher volatility and increased losses in down markets, so the best use of RSP is as a long-term buy-and-hold investment.
Type: Large-cap dividend stock
You want to keep all the dividend income you can, so the lower the fees, the more your take-home. That means investors can do a lot worse than the bargain-priced Schwab U.S. Dividend Equity ETF (SCHD), which costs just $7 a year for every $10,000 investment.
SCHD tracks the Dow Jones U.S. Dividend 100 Index, a measure of high-yielding stocks in the U.S. But SCHD doesn’t only look at headline yield; it applies screens that focus on dividend consistency and other financial strength factors.
That means investors don’t just get a nice payout — they also get holdings with the fundamentals to keep churning out those dividends. Top dogs among SCHD’s 100 holdings include Home Depot Inc. (HD) and Microsoft Corporation (MSFT), and as a whole, the basket of stocks yields a comfortable 2.9%.
Since inception in 2011, SCHD has returned 14.13% on average, with plenty of return from the dividend and little stripped out by the meager expense ratio. If you’re looking for dividends on the cheap, SCHD is one of the best ETFs for you.
Type: Small-cap value stock
You need small-cap stocks to generate growth, but believe it or not, one of the best strategies for going long small-caps for outsize performance is value. After all, small-caps typically outgrow large-caps and value typically beats growth, so when you pair the two together, small-cap value has been the best way to generate returns over the history of market.
Data from famed economists Fama and French back this up.
The Vanguard Small-Cap Value ETF (VBR) follows an index of the cheapest small-cap stocks in the U.S. The 846 stocks in the VBR trade currently for a total price-to-earnings ratio of 16. The broader Vanguard Small-Cap ETF (VB) can currently be had for P/E of nearly 20. And there’s also a dividend play here, as VBR doles out 1.97% in yield — 50 more basis points than its broader small-cap brother.
VBR’s low fees and positioning in one of Wall Street’s sweet spots have resulted in 9.1% annual returns since 2004 inception, including outperformance of both VB and the S&P 500.
Thus, VBR is one of the top ETFs to buy for long-term returns.
Type: Industry (Internet)
The so-called “FANGs” have had their ups and downs over the past year, but there’s no denying the power that the likes of Google parent Alphabet Inc. (GOOGL) and Amazon.com, Inc. (AMZN) have over the market, not to mention their seemingly unstoppable growth ramp. The same could be said for a variety of internet-focused tech stocks that boast high margins and cash flows, and low operating costs.
And that’s why the First Trust DJ Internet Index Fund (FDN) is such a powerful ETF for the long haul.
FDN tracks the Dow Jones Internet Composite Index, which includes internet-focused firms in the U.S. You’re getting the Googles and Amazons of the world; if it operates a website and derives the bulk of its revenues from that site, then FDN has it.
Since launching in 2008, FDN has put up a staggering return of 406%, which comes out to about 15.2% annually — crushing the market as well as other tech funds.
Type: Sector (Real estate)
Real estate investment trusts (REITs) belong in every portfolio. These companies are tax-advantaged business structures designed to own and operate real estate. And to keep those tax advantages, REITs must pay out at least 90% of their income as dividends. Their total return power, then, has made them one of the best asset classes to own over the long haul.
While there are quite a few REIT ETFs on the market, the iShares U.S. Real Estate ETF (IYR) could be the best one to own.
Many of the other REIT ETFs on the market don’t include specialized REITs like timber or mortgage companies. However, IYR includes them all for a total holding count of 126 that provides more diversification across REIT type. This broader focus shows up in a slightly higher yield (3.6%) than many of its rivals, and that’s largely thanks to the mREIT exposure.
But don’t worry — the fund is not heavily weighted in these somewhat riskier stocks. You get enough to pay you more without putting the ETF in serious peril.
Type: U.S. bonds
Expenses: 0.55% (includes 10-basis-point fee waiver)
The environment for bond investors is downright odd at the moment. While the Federal Reserve has raised the fed funds rate three times in the past year, rates themselves are still low, and yields abysmal. It takes a deft touch to navigate these waters.
Luckily, TOTL is run by one of the top bond managers on the planet.
The SPDR DoubleLine Total Return Tactical ETF (TOTL) is run by DoubleLine Capital bond guru Jeff Gundlach. This is run very similar to DoubleLine Total Return Bond Fund (DBLTX) and can trade in and out of bonds as opportunities arise. Today, Gundlach has the majority (52%) of the ETF invested in mortgage-backed securities. Treasury bonds, floating-rate bank loans, commercial mortgage securities and investment-grade corporate bonds round out the top five bond-class holdings.
TOTL has managed to outperform the broader Bloomberg Barclays U.S. Aggregate Bond Index since the ETFs inception, and that includes a slightly higher-than-usual expense ratio of 0.55%. But smart management justifies higher expenses. For investors looking for core bond exposure, Gundlach’s ETF is a great choice.
Type: Emerging-market equity
The general perception of emerging markets is that they’re full of risky and immature companies. However, these less-developed international markets still can be a fertile hunting ground for dividend investors. ETFs make it that much easier to invest in these regions with confidence.
The $1.9 billion WisdomTree Emerging Markets Equity Income ETF (DEM) tracks 317 different companies, many of which U.S. investors have never heard of. Tong Yang Life Insurance? How about Formosa Plastics? These are some of the holdings in a fund that features large weights in financials (22%), telecom (15%) and information technology (14%).
The benefit of using DEM to gain access to these emerging-market dividend payers is a 3.9% distribution, providing more protection against the volatility of EMs than many funds tend to offer.
Type: International stock
More than half the world’s market capitalization is found outside the U.S., so it’s important to own international stocks in your portfolio for geographic diversity. While you can go the route of an emerging-market focus like DEM, you also can go super-broad market with the iShares Core MSCI Total International Stock ETF (IXUS).
IXUS puts nearly 3,350 stocks in your pocket for 11 basis points a year. This includes developed- and emerging-market nations, and it includes small-, mid- and large-cap stocks. Though market capitalization does matter, so the top holdings are spread against large companies such as Swiss consumer play Nestle SA (NSRGY) and Chinese internet stock Tencent Holdings (TCEHY).
International stocks haven’t knocked it out of the park lately thanks to the strong U.S. dollar, but that’s not a permanent world condition. IXUS’ user-low fees of just 0.11% allows investors to keep almost all of their returns, which is crucial during weaker periods.
And in a weak-dollar environment, IXUS is one of the best ETFs you can buy for broad international exposure.
Growth stocks are a great way to find … well, growth. But how things like growth and value are defined can differ between managers, and sometimes stocks will overlap both growth and value indices. That’s why I like the iShares Edge MSCI USA Momentum Factor ETF (MTUM).
MTUM is a smart-beta ETF that uses screens to find stocks that exhibit high momentum. This means investors have continued to value their share prices as they surge higher over time. Much of that is based on growth expectations for a particular industry or stock. But using these screens and creating a set of rules it must follow, MTUM allows investors to truly tap into growth stocks and their total returns.
In short, this ETF is designed to give your portfolio a shot in the arm.
The relatively young ETF has put up 13%-plus average annual returns over the past three years. Add in a low 0.15% expense ratio, and you can see how more than $3 billion has flowed into this fund.
This article is from Aaron Levitt of InvestorPlace. As of this writing, Aaron Levitt was long IXUS.
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