Kip ETF 20: The Best Cheap ETFs You Can Buy
You can build a solid core for your portfolio and explore new opportunities with our favorite low-cost exchange-traded funds.
Despite a market buffeted by big moves and clouded by uncertainty, the past year has been huge for exchange-traded funds, those increasingly popular low-cost securities that hold baskets of assets and trade like stocks.
Assets in ETFs topped $4 trillion last year, ahead of the $3.8 trillion in index mutual funds. In October, most brokerage firms eliminated commissions to trade shares in ETFs (and stocks), too, which fueled asset flows.
The final stamp of approval came from the federal government itself: The Federal Reserve invested billions of dollars in 16 investment-grade and high-yield corporate bond ETFs between May and June as part of a program to prop up the bond market.
Against this backdrop, we reviewed the Kiplinger ETF 20, the list of our favorite exchange-traded funds. “It’s an interesting moment for ETFs,” says Rich Powers, head of Vanguard’s ETF product management. The Fed chose ETFs as a way to support the bond market for the same reasons individual investors favor these securities. “They’re efficient, low-cost and cover the breadth of the market they invest in,” says Powers.
Read on for more analysis of our Kiplinger ETF 20 picks, which allow investors to tackle various strategies at a low cost.
Data is as of July 27, 2020. Dow Jones, fund companies, Morningstar, MSCI, YCharts. Yields represent the trailing 12-month yield, which is a standard measure for equity funds.
iShares Core S&P 500
- Dividend yield: 2.0%
- Expense ratio: 0.03%
This ETF tracks the S&P 500 Index, which has been hard to beat. Even with the 2020 bear-market drop, iShares Core S&P 500 (IVV, $322) boasts an 11.6% annualized five-year return.
The S&P 500 covers 80% of the U.S. market, as measured by market value. The 506 stocks in the fund are mostly giant-size companies, with an average market value of $145 billion, a tad higher than the $138 billion average market cap of the index.
iShares Core S&P Mid-Cap, iShares Core S&P Small Cap
IJH
- Dividend yield: 1.8%
- Expense ratio: 0.05%
IJR
- Dividend yield: 1.7%
- Expense ratio: 0.06%
Smaller firms have lagged their bigger brethren, which is why the five-year returns of these funds pale next to the return of the large-cap Core S&P 500 ETF. Over the past five years, iShares Core S&P Small-Cap (IJR, $71) has returned 5.9% annualized; iShares Core S&P Mid-Cap (IJH, $186), 6.7%.
But investors who want to beef up their exposure to smaller companies should consider these ETFs, especially if they hold Core S&P 500. The trio work well in combination because there’s little overlap in holdings among funds. Core S&P Small-Cap holds 600 stocks with an average market value of $1.5 billion. The 400 stocks in Core S&P Mid-Cap have an average market value of $4.9 billion.
Vanguard Total International Stock
- Dividend yield: 2.6%
- Expense ratio: 0.08%
Vanguard Total International Stock (VXUS, $52), which holds more than 7,000 stocks, offers exposure to companies of all sizes in foreign countries large and small. Because it weights stocks by market value, the biggest companies dominate the fund; the average market value of its holdings is $23.8 billion.
Overall, VXUS has about 77% of its assets in developed markets, led by Japan at 7%. Emerging-markets stocks in developing countries such as China, India and South Korea round out the fund.
Vanguard Total Stock Market
- Dividend yield: 1.9%
- Expense ratio: 0.03%
Focus on Vanguard Total Stock Market (VTI, $164) if you want a single set-it-and-forget-it U.S. stock fund. It holds nearly all U.S. publicly traded companies—nearly 3,500 large, medium and small stocks.
Small-company stocks have lagged their larger counterparts in recent years, which is why Total Stock Market lags the large-cap-heavy S&P 500 index by a smidge over the past five years.
Schwab US Dividend Equity
- Dividend yield: 3.5%
- Expense ratio: 0.06%
Schwab US Dividend Equity (SCHD, $54) zeroes in on the highest-yielding financially strong firms. Potential stocks must have a history of paying annual dividends over the past 10 years (at least) and meet the ETF’s prescribed measures of cash flow to debt, dividend yield, dividend growth and profitability, too.
That distills its holdings to roughly 100 big firms, such as United Parcel Service (UPS) and investment firm BlackRock (BLK). But the ETF’s formula tilts toward companies whose fortunes rise and fall with the economy, which hurt the fund during the sell-off earlier this year, relative to other dividend-stock peers.
Even so, US Dividend Equity’s five-year annualized record of 10.8% is solid.
Vanguard Dividend Appreciation
- Dividend yield: 1.9%
- Expense ratio: 0.06%
A high yield matters less to this fund than whether a company has boosted its annual dividend consistently—a trait that typically points to well-run firms with rising profits and stock prices.
Vanguard Dividend Appreciation (VIG, $123) tracks an index of 225 companies with at least 10 years of annual dividend hikes; established firms such as Walmart (WMT), Microsoft (MSFT) and Johnson & Johnson (JNJ) dominate.
The fund’s five-year annualized return: 11.7%.
WisdomTree Global ex-US Quality Dividend Growth
- Dividend yield: 1.9%
- Expense ratio: 0.58%
WisdomTree Global ex-US Quality Dividend Growth's (DNL, $67) focuses on high-quality foreign dividend payers with dependable profits. Qualifying stocks are ranked by payout: The bigger the dividend, the bigger the stock’s share of the fund’s assets. Novo Nordisk (NVO) and British American Tobacco (BTI) are top holdings.
The fund has been a rewarding way to invest overseas. Its 8.7% five-year annualized return beats the 7.4% gain in the MSCI ACWI ex USA index.
Ark Innovation
- Dividend yield: N/A
- Expense ratio: 0.75%
Invention and originality are at the heart of this actively managed fund. Ark Innovation (ARKK, $82) holds 34 stocks in firms leading the way in genomics, automation, next-gen internet and financial technology. Some, such as Tesla (TSLA), are well known. But most, such as genetic-editing company CRISPR Therapeutics (CRSP), are less so.
Expect a bumpy ride, but rich returns for patient investors—32.5% annualized over five years.
Fidelity MSCI Industrials Index
- Dividend yield: 1.9%*
- Expense ratio: 0.084%
Industrial stocks got walloped earlier this year, but they have come roaring back. These companies, which typically include construction equipment businesses, factory machinery makers, and aerospace and transportation firms, tend to benefit during economic recoveries. Union Pacific (UNP), Honeywell International (HON, an industrial conglomerate) and Lockheed Martin (LMT) top the portfolio at Fidelity MSCI Industrials Index (FIDU, $38).
Although troubles at Boeing (BA) and General Electric (GE) have been a drag on returns over the past 12 months, the fund’s 8.8% annualized return over the past five years is decent.
Invesco Financial Preferred
- SEC yield: 5.0%*
- Expense ratio: 0.62%
Preferred stocks issued by big banks fill Invesco Financial Preferred (PGF, $18). These securities pay fixed dividends like bonds but have the potential to appreciate like stocks. The payouts are typically higher than the dividends of common shares.
The result: more bang for the buck. The fund’s 5.8% five-year annualized return matches the return of the S&P 500 Financials index over the same period, with one-third the volatility.
Top holdings include JPMorgan Chase (JPM), PNC Financial Services Group (PNC) and Wells Fargo (WFC) preferred shares.
* SEC yield reflects the interest earned after deducting fund expenses for the most recent 30-day period and is a standard measure for bond and preferred-stock funds.
Invesco S&P 500 Equal Weight Health Care
- Dividend yield: 0.6%
- Expense ratio: 0.40%
What you see in the name of this ETF is what you get: Invesco S&P 500 Equal Weight Health Care (RYH, $239) holds a diversified mix of stocks—the 63 health care firms in the S&P 500—in equal portions.
The setup means midsize companies, such as Dentsply Sirona (XRAY), with a $9.5 billion market value, get as much play as biotech behemoth Amgen (AMGN), with a $150 billion market cap. The fund’s five-year annualized return: 8.9%.
Invesco WilderHill Clean Energy
- Dividend yield: 1.2%
- Expense ratio: 0.70%
Alternative energy is gaining ground. Renewable energy generated more power in the U.S. than coal for the first time ever in 2019. Invesco WilderHill Clean Energy (PBW, $49) invests in firms working with a variety of renewable sources—wind, solar, hydro, geothermal and biofuel—and clean-energy technologies.
The diversity is a plus: “You don’t need to make a bet on which clean energy will win with this ETF,” says Jason Bloom, global macro ETF strategist at Invesco.
The fund has gained 63.6% over the past 12 months, but that outsized return came with a lot of volatility. During the coronavirus selloff, the ETF surrendered 46.7%.
iShares MSCI USA ESG Select
- Dividend yield: 1.5%
- Expense ratio: 0.25%
COVID-19 put a spotlight on environmental, social and governance (ESG) characteristics because stocks that exemplify these traits held up well in the sell-off. iShares MSCI USA ESG Select's (SUSA, $141) one-year return of 14.0% beat 96% of its peers and the S&P 500. Its three- and five-year returns beat most of its peers and the index, too.
Large and midsize companies fill the fund; Apple (AAPL) and Microsoft are top holdings.
Pimco Active Bond
- SEC yield: 1.9%
- Expense ratio: 0.55%
After the bond market got slaughtered in March, the managers behind Pimco Active Bond (BOND, $113) hunkered down with high-quality, government-guaranteed mortgage-backed securities and top-grade corporate debt.
Though it trails the Bloomberg Barclays U.S. Aggregate Bond index over the past 12 months, the fund’s five-year annualized return is in line with the benchmark’s.
SPDR DoubleLine Total Return Tactical
- SEC yield: 2.0%
- Expense ratio: 0.55%
Bond gurus from fund firm DoubleLine have positioned this intermediate-term bond ETF with a nearly 70% tilt toward triple-A-rated bonds—namely government-guaranteed mortgage-backed securities and Treasuries.
SPDR DoubleLine Total Return Tactical (TOTL, $50) doesn’t hold much in corporate debt, which hurt returns in 2019. But it held up better than the Agg index when bonds plummeted in March.
Invesco Senior Loan Portfolio
- SEC yield: 4.1%
- Expense ratio: 0.65%*
Invesco Senior Loan Portfolio (BKLN, $22) holds short-term loans made by banks to firms with poor credit ratings, hence the generous 4.1% yield. But this fund isn’t holding the junkiest bonds. In fact, 18% of its holdings are rated investment-grade (albeit triple-B, the lowest investment-grade tier). Most of the ETF’s holdings are in double- and single-B-rated bank loans.
Though default rates are rising, this fund has just 1.6% of assets invested in the troubled energy sector, according to Invesco, where defaults have been concentrated.
* Includes 1-basis-point fee waiver.
iShares Ultra Short-Term Bond ETF
- SEC yield: 0.6%
- Expense ratio: 0.08%
Don’t look for income from this actively managed fund. iShares Ultra Short-Term Bond (ICSH, $51) yields just 0.6% and holds a mix of cash and corporate debt with one- to three-year maturities.
But the fund provides defense in rocky markets. It held up superbly during the market’s March sell-off in bonds, with a loss of less than 1% (the Agg index ceded 5.7%). Plus, the fund’s 2.5% three-year return beats most money market fund yields.
Vanguard Intermediate-Term Bond
- SEC yield: 1.1%
- Expense ratio: 0.05%
Studies show that active bond pickers have outperformed the Agg over long stretches. But Vanguard Intermediate-Term Bond (BIV, $94) has beaten the Agg in eight out of the past 10 calendar years (and so far in 2020, too).
BIV holds mostly Treasuries and U.S. corporate bonds, with a smattering of international investment-grade, dollar-denominated debt—all with five- to 10-year maturities. The fund yields 1.1%.
Vanguard Total International Bond
- SEC yield: 0.4%
- Expense ratio: 0.08%
Negative interest rates in key foreign nations weigh on this fund’s paltry 0.4% yield. But this ETF offers diversification benefits.
Vanguard Total International Bond (BNDX, $58) invests in high-grade foreign government and corporate debt. Prospects are improving, too: After the pandemic, foreign economies are expected to rebound faster than the U.S. In the meantime, the fund’s five-year 4.4% annualized return is respectable.
Because the fund holds foreign bonds issued in local currencies, not U.S. dollars, Total International Bond provides a hedge against currency risk to smooth out the ride for investors. Currency fluctuations can double the volatility of a global bond fund.
