ETFs—An Easy Way to Invest
Our picks for the Kiplinger ETF 20 match their indexes as closely and as cheaply as possible.
Finding it hard to choose among the sheer volume of investment products? Bogged down by the chores, financial and otherwise, on your to-do list? Have we got an issue for you. This month we’ll simplify your financial decisions, and your life, starting with a new feature: the Kiplinger ETF 20, our picks of the top 20 exchange-traded funds among the 1,740 now available.
See Also -- TOOL: Top-Performing Mutual Funds by Category
Choosing 20 ETFs was a lot different than selecting the 25 mutual funds in the Kiplinger 25, the list of our favorite mutual funds. With mutual funds, we’re looking for experienced managers with impressive track records. But with ETFs, most of which track indexes, it’s all about settling on the right index and finding funds that match it as closely and as cheaply as possible.
That task was undertaken by executive editor Manny Schiffres, who supervises our investing coverage, and senior associate editor Nellie Huang, our mutual fund specialist who also compiles the Kip 25. Manny and Nellie got the ball rolling by listing the categories we’d like to include—everything from broad-based funds that cover the entire universe of stocks to “opportunistic” funds, which let you invest in a narrow sector to take advantage of current market conditions.
Then it was up to Nellie to fill in the blanks. This was no mean feat because the very simplicity of ETFs often makes it difficult to tell them apart. There may be several funds tracking similar indexes with a similar mix of investments. To choose among such look-alike products, Nellie considered a fund’s “tracking error,” its ability to perform in line with its index. She also gave more weight to ETFs with above-average assets and above-average daily trading volume, both of which help to keep costs low.
Beyond comparing the numbers, Nellie added her own expertise to whittle the list. For instance, she ended up rejecting so-called mega-cap funds (“better to stick with the S&P 500”) and micro-cap funds (“too new and too few—you’re not getting much more for the risk you’re taking on”). An ETF that invests in real estate investment trusts made her top 30, but she ultimately left it off the list because “it’s not the best time to buy a REIT fund.” She did, however, choose an actively managed bond ETF, Pimco Total Return Active ETF. That fund has a team of talented managers who took over last year after the departure of Pimco founder Bill Gross and who have beaten their index.
As an investor, you can use the Kiplinger ETF 20 in a number of ways: to find an all-in-one investment that you can buy and hold, for instance, or to make a tactical bet on a slice of the market. Regardless of what you’re looking for, we’ve made your search a lot easier.
Because we’ve streamlined your choices, you’ll have more time to read our cover story. There you’ll find 10 more one-and-done steps to simplify the rest of your finances. And if you’d rather leave your to-do list to someone else, see 15 Outsourcing Services to Make Your Life Easier.
For Vanguard investors. If you have access to a Vanguard fund in your 401(k) or 403(b) plan, Nellie’s story on the topic is a must-read. In this first in a series on retirement-plan choices, she analyzes the top actively managed Vanguard funds in employer-based plans. In the future, we’ll feature offerings from the rest of the big four: Fidelity, T. Rowe Price and American Funds. One takeaway: If you’re already invested in Vanguard Primecap in your 401(k), jump at the chance to contribute more to this stellar fund, which is otherwise closed to new investors. You can also invest in Primecap if you’re a Vanguard Flagship client.