The 22 Best ETFs to Buy for a Prosperous 2022
Capture deep value. Build a portfolio core. Play defense. The 22 best ETFs for 2022 cover a wide range of options for numerous objectives.
Exchange-traded funds (ETF) are investing's Swiss Army knife. You can do just about anything with them: build a portfolio core, get tactical on defense, take a moonshot or even profit when the market drops. And we kept all these objectives and more in mind as we built our list of the 22 best ETFs to buy for 2022.
Hey. If 2020 and 2021 have taught us all anything, it's that we need to be prepared.
To be clear: The best ETFs for 2022, just like in each previous year's list, do include optimistic funds designed to take advantage of the various trends Wall Street's analysts and strategists see playing out in the year ahead. That goes for stocks, bonds and commodities alike.
But while you and I might assign some significance to arbitrary calendar dates like Jan. 1 and Dec. 31, the markets assuredly don't. That's why we also typically include a few go-anywhere funds that would be just as suitable in 2022 as they would be in 2012 or 2032. We also try to provide investors with a couple of fire extinguishers – defensive options that you might only tap when storm clouds descend upon Wall Street.
So, what does the crystal ball say about 2022? A host of strategists are predicting modest gains in the high single digits: Goldman Sachs says the S&P 500 will hit 5,100. RBC says 5,050, as does LPL Financial at the midpoint of their range – and Kiplinger's Personal Finance Executive Editor Anne Kates Smith agrees with them. "Think somewhere a bit above 5,050 for the S&P 500, or north of 39,000 for the Dow Jones Industrial Average," she says in our 2022 outlook. (The S&P 500 sits at 4,649 presently.)
Wall Street isn't unanimously bullish, however. BofA is calling for a slight decline to 4,600 by 2022's end, while Morgan Stanley thinks we'll be a full 5% lower, at 4,400.
And naturally, no one expects that performance to come in a straight line, nor do they expect every sector to contribute to those gains or losses evenly. Value and cyclical sectors are popular calls yet again for 2022, though analysts are a bit skittish that the omicron COVID variant will act as yet another hurdle in the recovery.
Here are the 22 best ETFs to buy for 2022. If it seems like a shotgun blast of a selection, that's on purpose. Investors might be chasing a wide array of objectives in the year to come – each of these ETF picks represents a top-flight way to achieve them. Importantly, this is not a suggestion to build a portfolio of all 22 picks, but we do believe there are at least a couple of funds for every type of investor. So read on and discover which well-built ETFs best match what you're trying to accomplish in 2022.
Data is as of Dec. 21. Dividend yields represent the trailing 12-month yield, which is a standard measure for equity funds.
Vanguard S&P 500 ETF
- Type: Large-cap blend
- Assets under management: $266.4 billion
- Dividend yield: 1.3%
- Expenses: 0.03%, or $3 annually for every $10,000 invested
We'll start our look at 2022's best ETFs with a fund that most readers are probably well aware of: the Vanguard S&P 500 ETF (VOO, $425.69). And you can bet your bottom dollar that we'll lead with an S&P 500-tracking index fund in every annual list in the foreseeable future.
After all, their peers just can't keep up.
Every year, we keep our eyes on the S&P Dow Jones Indices annual report on actively managed funds, even though it reads like a broken record. From the most recent report in April, recapping 2020:
"[Actively managed] large-cap funds picked up where they left off the previous decade – for the 11th consecutive one-year period, the majority (60%) underperformed the S&P 500."
If this were college football, we'd be questioning whether this is even really a rivalry anymore.
But think about it: For 11 straight years, the majority of seasoned professionals – experts who are paid, and paid well, to select stocks for their customers – who are slinging large-cap blend products can't beat the benchmark. So, what chance, exactly, do you think your average investor, who has maybe an hour each week to dedicate toward reviewing their portfolio, has of outrunning the index?
Moreover, S&P 500 index funds are even beating out other large-blend index strategies. With just a couple weeks to go in 2021, the VOO was outperforming 80% of its Morningstar category peers and had earned a full five out of five stars from Morningstar's rating system.
As far as the product itself goes: The Vanguard S&P 500 ETF exposes you to the 500 mostly U.S.-headquartered companies trading on major American stock exchanges. When someone says "the market," they usually mean the S&P 500.
Just remember: This isn't a perfectly balanced fund that gives you equal exposure to each of the market's 11 sectors. At the moment, technology stocks are tops at nearly 30% of the fund's assets; compare that to utilities, real estate, materials and energy, each of which account for less than 3%. It's also worth noting that the S&P 500 evolves with the American economy – in the late aughts, energy and tech were equals, per influence on the index.
And because the S&P 500 is market capitalization-weighted, larger companies mean more to its performance, too. Apple (AAPL) and Microsoft (MSFT) alone account for 13% of VOO's assets. The bottom 50 holdings account for just more than 1%. That means you're at some risk if investors "rotate" out of heavily weighted standouts such as Apple, Microsoft, Amazon.com (AMZN) or Tesla (TSLA).
Even with these risks, however, investors have long done well by investing in the index – and at 0.03% in annual expenses, there's no cheaper way to go about it. That's why VOO belongs among our 22 best ETFs to buy for 2022.
Vanguard High Dividend Yield ETF
- Type: Large-cap value
- Assets under management: $40.8 billion
- Dividend yield: 2.80%
- Expenses: 0.06%
Another "rivalry" that has been pretty lopsided for more than a decade has been growth's dominance over value – including what appears to be another win for growth in 2021. But for a second straight year, a sizable number of strategists are calling for a renaissance in underpriced stocks.
"Earlier in 2021, stocks of companies tied to the economic cycle – broadly categorized as value equities – began outperforming growth stocks, which dominated during the pandemic as demand for technology soared. That trade reversed after the Delta variant put the recovery in doubt," says Matt Peron, director of research at Janus Henderson. "But if GDP continues to expand as we expect in 2022 (short-term setbacks notwithstanding) and interest rates inch higher, value-oriented sectors such as financials, industrials, materials and energy might once again take the lead."
That's why, amid a host of funds that actually brand themselves as "value" funds, we've chosen the Vanguard High Dividend Yield ETF (VYM, $109.20) to represent large-cap value among our best ETFs for 2022.
Vanguard's VYM has a pretty straightforward goal: Invest in companies that have above-average yields. And it lives up to its name, offering a 2.8% current yield that's more than twice the S&P 500 at present.
But in doing so, Vanguard High Dividend Yield ETF also has higher-than-category-average exposure to three of the aforementioned value sectors going into 2022: financial services (23%), energy (8%) and materials (4%). The fourth – industrials, at 10% of assets – is just two percentage points below the category norm.
Peron adds that during periods of tightening monetary policy, like what's expected out of the Federal Reserve this year, "investors often become valuation-sensitive, which could drive up the appeal of value stocks in the near term." That too would be good news for VYM's portfolio, which is cheaper than its peers by both price-to-earnings (P/E) and price-to-cash flow measurements.
Distillate U.S. Fundamental Stability & Value ETF
- Type: Large-cap blend
- Assets under management: $529.8 million
- Dividend yield: 1.5%
- Expenses: 0.39%
While our best ETFs for 2022 look wildly different than 2021's edition, a few select funds remained – and no fund has had more staying power on our annual list than Distillate U.S. Fundamental Stability & Value ETF (DSTL, $44.75).
That's partially because DSTL does things differently. And also because it gets results.
Many value ETFs rely on metrics such as P/E, price-to-sales (P/S) and price-to-book (P/B) to determine what looks underpriced. But Distillate's fund focuses on free cash flow (FCF, the cash profits left over after a company does any capital spending necessary to maintain the business) divided by enterprise value (EV, another way to measure a company's size that starts with market capitalization, then factors in debt owed and cash on hand).
Thomas Cole, CEO and co-founder of Distillate Capital, explains that the fund looks at FCF/EV because while companies can "adjust" certain figures, such as earnings and revenues (which can in turn mess with valuation metrics based on those figures), "you can't fake cash."
Distillate U.S. Fundamental Stability & Value ETF starts out with 500 of the largest U.S. companies, then weeds out ones that are expensive based on its definition of value, as well as those with high debt and/or volatile cash flows. The result is a portfolio that does not look much like a traditional value fund – while industrials are big at 22% of holdings, DSTL is also heavy in healthcare (23%), technology (21%) and consumer cyclical (14%) names. Heck, Morningstar doesn't even see Distillate's ETF as a large value fund, but a large blend fund instead.
Cole's approach to value also has him viewing the current market much differently than most of us.
"Our overall observation is that the market isn't as insidiously expensive on the basis of the free cash flow it generates than it would be if you rested your conclusions on measures like P/E and P/B," he says.
Performance looks awfully rosy through Cole's lenses, too. DSTL is on pace to outdo most of its peers in 2021. And since inception on Oct. 23, 2018, the fund has not only spanked the three highest-asset large value ETFs by an average of 41 percentage points – it has beaten out the S&P 500 by a solid 10 points to boot.
Pacer US Small Cap Cash Cows 100 ETF
- Type: Small-cap value
- Assets under management: $574.2 million
- Dividend yield: 0.60%
- Expenses: 0.59%
Investors would also do well to extend their bargain hunting well outside the confines of large-cap stocks. For many Wall Street prognosticators, smaller firms are much more appealing.
"While large and mid-caps trade at a 35%-40% premium to history, small caps now trade in-line with history," says Jill Carey Hall, equity and quant strategist for BofA Securities. "In addition to being the least expensive, they are also a better diversifier. … While asset class returns have grown more correlated vs. 20 years ago, the [small-cap] Russell 2000 is less correlated with other asset class returns on average than the Russell MidCap or S&P 500 both over the last three years and the last few decades."
Our best ETFs to buy for 2022 include two ways to attack small-cap value. First up: the Pacer US Small Cap Cash Cows 100 ETF (CALF, $42.34).
Pacer's CALF views value in much the same way that Distillate's DSTL does, using FCF/EV – or "free cash flow yield" – as its preferred metric. Specifically, CALF selects the 100 top S&P SmallCap 600 stocks by free cash flow yield, then weights them by the metric and rebalances the portfolio every quarter. For balance, holdings are capped at a 2% weight at each rebalance.
Again, Pacer US Small Cap Cash Cows 100's current holdings aren't what you might expect from a value fund. Most striking: Nearly half of the ETF's weight is in consumer discretionary stocks; industrials are the only other double-digit weight at 13%.
It's hard to find many ETFs that are as beloved by fund raters as CALF. Pacer's fund currently earns a full five stars from Morningstar, and independent research firm CFRA lists the fund among the highest-scoring small-cap equity ETFs it covers.
Roundhill Acquirers Deep Value ETF
- Type: Small-cap value
- Assets under management: $52.4 million
- Dividend yield: 1.1%
- Expenses: 0.80%
Another CFRA suggestion for peeling the small-cap value orange is the Roundhill Acquirers Deep Value ETF (DEEP, $35.81), and there's nothing subtle about this one.
DEEP targets "deeply undervalued small-and-microcap stocks." It does so using "The Acquirer's Multiple" – a valuation metric published in 2014 by Tobias Carlisle, founder and managing director of Acquirers Funds. The Acquirer's Multiple also focuses on enterprise value, but instead of FCF, it divides by operating earnings.
"Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items – earnings that a company does not expect to recur in future years – ensures that these earnings are related only to operations."
The 100-stock portfolio's average holding is just under $1 billion in market cap. According to Morningstar, 79% of the fund is in micro-cap stocks, 20% is in small caps and the remaining 1% is in mids. And each holding gets an equal say in performance, as they're set at a 1% weight apiece at every quarterly rebalancing. Top holdings heading into 2022 include process automation specialist Hollysys Automation Technologies (HOLI) and protective clothing provider Lakeland Industries (LAKE).
Sector weightings are a little more lopsided. The portfolio is dominated by financials (30%), consumer discretionary (24%) and industrials (22%). That leaves less than a quarter of the rest of the fund to be split among seven other sectors.
Unsurprisingly, this aggressive approach can go sideways; Roundhill's fund was trampled by both broad small-cap and value indices in 2019 and 2020, for instance. But it has outperformed by varying degrees across all of 2021.
Just note that DEEP ain't cheap. Its 0.80% in annual expenses are well above the norm for your average index fund.
iShares MSCI USA Quality Factor ETF
- Type: Large-cap stocks (Quality factor)
- Assets under management: $24.2 billion
- Dividend yield: 1.2%
- Expenses: 0.15%
A nearly universal concession is that corporate America will have a much harder time finding growth in 2022 compared to 2021, in large part because year-over-year comparisons won't be nearly as easy.
That means investors will need to be more selective, and for many strategists, that puts an increased emphasis on the "quality" factor.
"In previous cycles when the yield curve has flattened, the impact on equities has seen investors seek quality companies that could survive any impending rates shock," says William Davies, deputy global chief investment officer at Columbia Threadneedle Investments, who notes that for him, quality includes solid balance sheets and strong competitive advantages. "As we head into 2022, we have seen the yield curve steepen, flatten and rise across the curve again, and that has led to a more mixed scenario in terms of what is leading the market. … The companies we like – quality businesses with solid balance sheets and competitive advantages – stand a better chance of weathering volatility."
The iShares MSCI USA Quality Factor ETF (QUAL, $141.72) is one of the largest ETFs focused on the quality factor. QUAL currently holds a roughly 75/25 split of large- and mid-cap stocks that boast positive fundamentals such as high return on equity, stable year-over-year earnings growth and low financial leverage.
Tech firms such as Apple and Microsoft are currently tops at 28%, though iShares MSCI USA Quality Factor ETF also gives double-digit ratings to healthcare, consumer discretionary, communication services and financials. But like many funds focused on a host of fundamental metrics, these sector weights could shift wildly over time.
Still, QUAL looks like it could be one of the top ETFs to buy for 2022 for investors who want to anchor their portfolio with blue-chip stocks that have bulletproof financials. Especially if they like a bargain: The 0.15% expense ratio undercuts 93% of the ETF's peers.
iShares ESG Aware MSCI USA ETF
- Type: Large-cap blend (ESG criteria)
- Assets under management: $24.3 billion
- Dividend yield: 1.1%
- Expenses: 0.15%
One of the most prominent trends of the past few years has been a shift toward prioritizing environmental, social and corporate governance, or ESG, criteria. Investors who are concerned about everything from sustainable practices to minority representation in company boardrooms are demanding changes.
This is translating into a true investing windfall. According to BofA Securities, through roughly three-quarters of 2021, $3 out of every $10 in global equity inflows (and $1 of every $10 in global bond inflows) was going to ESG. Longer-term, BlackRock notes that ESG ETF assets under management have grown by more than 300% annually over the past four years.
The opportunity is far from over.
"Strong evidence suggests that the interest in ESG products and solutions is just getting started," says Brad McMillan, chief investment officer for Registered Investment Adviser and independent broker-dealer Commonwealth Financial Network. "On the investor side, an estimated $73 trillion wealth transfer is set to occur over the next 25 years. Much of this wealth will fall into the hands of two demographics: women and millennials. Both groups have a keen interest in sustainable investing. In the future, their significant capital is likely to be repositioned toward ESG sectors."
You could always pick individual stocks, like those in Kiplinger's ESG 20. But one of the easiest and cheapest ways to invest with an eye toward ESG is a simple index fund: the iShares ESG Aware MSCI USA ETF (ESGU, $105.29).
ESGU tracks the MSCI USA Extended ESG Focus Index, made up of large- and mid-cap stocks that MSCI has determined possess positive ESG characteristics. The index also excludes firms such as weapons manufacturers and tobacco companies, as well as those "involved in very severe business controversies."
What you get is, in effect, a core large-cap holding. ESGU currently has 320 stocks in the portfolio, including many large S&P 500 components such as Apple, Microsoft and Nvidia (NVDA). Performance since late 2016 inception hasn't been much different than an S&P 500 tracker, either, with a total return of 127% versus 132% for the iShares Core S&P 500 ETF (IVV).
It still has some of the same hang-ups as an S&P 500, too – Apple and Microsoft are massive individual weights of more than 6% and 5%, respectively, and the tech sector dominates at 30% of assets.
Also, what's "responsible" to you might not be the same as what's responsible to iShares, so you might not agree on the virtues of a few, some or many of ESGU's holdings. If that's the case, consider these other ESG funds instead.
Industrial Select Sector SPDR Fund
- Type: Sector (Industrials)
- Assets under management: $16.8 billion
- Dividend yield: 1.3%
- Expenses: 0.12%
We'll shift into looking at slices of the market, beginning with a popular pick for 2022: the industrials sector.
Industrials, which include manufacturers, construction firms and a host of transportation companies, among other industries, tend to do well as economies expand and when inflation runs hot.
"The industrial economy is positioned to perform stronger for longer, with industrial production expected to be better than the long-term average in FY22," say Stifel analysts in their 2022 lookahead. "The demand side remains healthy and, coupled with supply chain constraints, should sustain industrial production at 4% or better."
The $1.2 trillion Infrastructure Investment and Jobs Act, passed in November, is putting some extra pep into sector expectations, not just in 2022, but much further down the road.
We like a plain-Jane approach to industrials here, so we're counting the Industrial Select Sector SPDR Fund (XLI, $102.42) among our best ETFs to buy for 2022.
The XLI holds every industrial-sector stock in the S&P 500, which at the moment numbers 72. Naturally, that skews toward large caps in the first place, and since the fund is market cap-weighted, the biggest stocks command the biggest weights. But at least at the moment, XLI doesn't have any eye-popping single-stock overweights. Railroad Union Pacific (UNP) is the only stock that commands more than 5% of assets, and United Parcel Service (UPS), Honeywell (HON) and Raytheon Technologies (RTX) each check in at more than 4%.
From an industry perspective, you're getting heaping helpings of machinery (19%), aerospace and defense (17%), industrial conglomerates (13%), and road and rail (12%). Air freight and logistics, professional services and airlines are among the various industries peppered in at single-digit weights.
We'll also note that XLI earns five out five stars from CFRA, which factors in forward-looking holdings-level analysis, relative performance and costs when compiling its ratings.
Global X U.S. Infrastructure Development ETF
- Type: Thematic (Infrastructure)
- Assets under management: $5.3 billion
- Dividend yield: 0.4%
- Expenses: 0.47%
As the infrastructure bill made its way through Washington, we recommended 12 infrastructure stocks to benefit from the bill – and one ETF: Global X U.S. Infrastructure Development ETF (PAVE, $27.87).
PAVE and its competitors are an example of how you have to look much deeper than an ETF's name. That's because many so-called infrastructure funds are rich in utility stocks, energy pipelines and other companies that seem less likely to directly benefit from the spending flowing from the IIJA.
But the Global X U.S. Infrastructure Development ETF, launched in 2017, was made with an eye toward America's crumbling infrastructure. Given the relative popularity of infrastructure spending across both political parties, a big outlay always seemed right around the corner – and PAVE was optimally designed to benefit.
PAVE holds nearly 100 stocks, most of which are from the industrial (72%) or materials (21%) sectors. Steelmaker Nucor (NUE), power management company Eaton (ETN) and construction materials firm Vulcan Materials (VMC) are a who's who of stocks that were first to mind as soon as President Joe Biden turned his attention to infrastructure spending.
As infrastructure dollars actually begin to be spent in 2022, PAVE's various components should feel a wind in their sails.
Vanguard Energy ETF
- Type: Sector (Energy)
- Assets under management: $5.6 billion
- Dividend yield: 3.8%
- Expenses: 0.10%
In December, CFRA looked more favorably upon two sectors: technology and energy.
"CFRA thinks cyclical sectors will be boosted now that the omicron-induced selloff has likely run its course," says Todd Rosenbluth, CFRA's head of ETF and mutual fund research. He noted that colleague Sam Stovall, chief investment strategist, upgraded tech and energy from Marketweight (equivalent of Hold) to Overweight (equivalent of Buy), adding that the sectors' relative strength in 2021 positions them for potential outperformance in 2022.
But while technology is bursting with attractive ETF options, "Investors have fewer appealing choices in the energy sector," Rosenbluth says. "CFRA has four or five-star ratings on just two of 19 ETFs classified in the U.S. sector."
One of those is the Vanguard Energy ETF (VDE, $76.44), which is, like XLI, another straightforward sector fund. Unlike XLI, however, VDE is more than the S&P 500's large caps – while the 104-holding fund is still heavy in large companies (58%), another 31% of assets are in mid-cap stocks and the remainder is in smalls.
Like most cap-weighted energy funds, though, VDE is all about Exxon Mobil (XOM) and Chevron (CVX), which combine to account for a whopping 37% of assets. That means more than a third of the fund's daily performance can be chalked up to whatever these integrated energy majors do on a particular day.
But the largest impact on VDE will be whatever oil prices do. Rosenbluth notes that Action Economics forecasts West Texas Intermediate (U.S. crude oil) prices to average $83.26 per barrel by late 2022 thanks in part to rising global GDP. Stovall adds that OPEC's "continued strong supply discipline will likely maintain upward pressure on prices."
TrueShares Technology, AI and Deep Learning ETF
- Type: Thematic (Multiple technologies)
- Assets under management: $28.4 million
- Dividend yield: 0.0%
- Expenses: 0.69%
The other sector CFRA is hotter on as we enter 2022 is technology. And Todd Rosenbluth, the firm's head of ETF and mutual fund research, says investors are being gifted an entry point in tech as we enter 2022.
"The recent pullback in high-growth, technology-oriented names represents an enhanced buying opportunity heading into 2022 amid a rising interest rate environment where supply constraints and inflationary pressures are likely to ease," he says.
In most years, investors could do just fine investing in a basic sector index fund and calling it a day. Honestly, that could do the trick again in 2022.
However, you might want to focus your investments in a handful of related breakthrough technologies that are beginning to change the way the world operates. If so, consider the young TrueShares Technology, AI and Deep Learning ETF (LRNZ, $47.24), which came to market in March 2020 and is the smallest of our best ETFs to buy for 2022, at just $28 million or so in assets under management.
"Deep learning is a convergence of opportunity and capability," says Michael Loukas, principal and CEO of LRNZ issuer TrueMark Investments. "[Artificial intelligence] has been around for, technically speaking, like 100 years. And the reality is that the first real application of it was during World War II when you started to see the codebreaking machines. And the reason it hasn't advanced far beyond where we are right now is because there wasn't enough processing power.
"AI and deep learning, for it to work, you need data, you need algorithms, and you need processing power, the hardware. And we're finally at a stage where the algorithms, the data, the processors, are all keeping up with one another. It's going to change the world fundamentally."
The LRNZ portfolio, then, is a tight 23-stock collection of leaders in artificial intelligence, machine learning or deep learning platforms, algorithms or applications. While holdings span several industries, cybersecurity, software-as-a-service and biotechnology stand out. "Those three areas are really intertwined with the growth and option of deep learning."
Global X Cybersecurity ETF
- Type: Industry (Cybersecurity)
- Assets under management: $1.1 billion
- Dividend yield: 0.0%
- Expenses: 0.50%
"Cybercrime is one of the most daunting and fastest-evolving threats facing companies today," say William Blair analysts Corey Tobin and Nabil Elsheshai. "It also presents an opportunity for investors to capitalize on the growth of the next generation of leading cybersecurity providers."
If you read the news, it's difficult to disagree. If there's anything we're often reminded of, it's that cybercriminals are constantly finding ways to access sensitive information from the government, the military and the private sector – and that the only way to fend them off is to pour more resources into cybersecurity.
That makes for some awfully attractive market forecasts.
"We anticipate that the cybersecurity software sector will grow at approximately 12% year-over-year in the intermediate term, reaching $220 billion by 2025, making it one of the fastest-growing segments of the software market, behind only customer relationship management and database management," Tobin and Elsheshai say.
ETF provider Global X cites Grand View Research estimates saying that growth will continue even farther into the future, to $370 billion by 2028. And that's a major selling point of their Global X Cybersecurity ETF (BUG, $31.67).
BUG is a pretty straightforward fund that invests in more than 30 cybersecurity stocks. Right now, top holdings include firewall specialist Palo Alto Networks (PANW), enterprise security firm Fortinet (FTNT) and broad cybersecurity provider Check Point Software (CHKP).
Invesco S&P 500 Equal Weight Real Estate ETF
- Type: Sector (Real estate)
- Assets under management: $124.3 million
- Dividend yield: 3.0%
- Expenses: 0.40%
Real estate investment trusts (REITs), typically one of the market's best sources of equity yield, are shaping up to be among the more popular picks of strategists looking ahead to 2022.
"Real estate investments stand to benefit from a number of macroeconomic crosscurrents: the economy is recovering, which should lead to higher occupancy rates and REITs have historically been among the best performing assets during periods of higher-than-normal inflation," say Jason Pride and Michael Reynolds, the respective chief investment officer of private wealth and vice president of investment strategy at investment management firm Glenmede.
Indeed, S&P Global notes that during the majority of periods of significantly rising rates, REITs have either matched or beaten the S&P 500.
The Invesco S&P 500 Equal Weight Real Estate ETF (EWRE, $40.60) provides a small twist on the traditional sector look. That is, it takes the 30 REITs within the S&P 500, and rather than weighting them by market capitalization, it instead equally weights them at every rebalancing. Top holdings right now include self-storage facility operator Public Storage (PSA), telecommunications infrastructure play Crown Castle (CCI) and data center REIT Equinix (EQIX).
The upshot of this is that the ETF is less likely to tank because any one component suddenly unraveled. Of course, the flipside is that if a larger component takes off, EWRE won't benefit as much as a cap-weighted fund will.
Another bonus: Invesco's fund offers a larger yield than many of its peers in a sector that's already known for its dividend generosity.
SPDR S&P Regional Banking ETF
- Type: Industry (Regional banks)
- Assets under management: $4.6 billion
- Dividend yield: 2.0%
- Expenses: 0.35%
The wide appeal of financial stocks – especially banks – as we enter 2022 isn't too difficult to understand.
An improving economy is generally good for financial activity, especially products such as mortgages and auto loans. And higher interest rates help banks enjoy better spreads between what they borrow at and what they lend at, fattening their bottom line.
"We believe investors should continue to [be] overweight U.S. banks, and three months into our 'buy the banks' call we feel even better about the positive [earnings per share] and valuation optionality from inflecting loan growth, cash redeployment and higher interest rates," says Christopher McGratty, analyst with Keefe, Bruyette & Woods (KBW). "Our preference is to own spread-based lenders with the [small and mid-cap stocks] offering the greatest relative value, while sooner/more frequent rate hikes could add 10% to 20% to 2023 [earnings] for many of our favorite asset-sensitive names."
KRE holds more than 140 regional banks, and does so via a modified equal weighting system that ensures there's a thinner representation gap between super-regionals and small, local banks. That's how $81 billion PNC Financial (PNC) ends up being the No. 5 weight at 1.9% … four slots below top holding First Citizens, which is just an $8 billion company.
iShares MSCI International Quality Factor ETF
- Type: International blend (Quality factor)
- Assets under management: $4.1 billion
- Dividend yield: 1.9%
- Expenses: 0.30%
Internationally speaking, developed-market equities – especially European stocks – have long been known for sporting much more attractive valuations compared to their U.S. counterparts. That remains the case today, but strategists also cite rebound potential as they look across the ponds.
"Globally, Europe and Japan were hit especially hard by the pandemic in 2021," says Ryan Detrick, chief market strategist for LPL Financial, the nation's largest independent broker-dealer. "But as COVID-19 cases potentially fall globally, those areas could be ripe for better economic growth in 2022."
Capital Group's European economist, Robert Lind, adds that "The major European economies may grow significantly faster [than the U.S.], in the 4.0% to 5.0% range, as the eurozone enjoys a delayed but now strong COVID rebound."
The iShares MSCI International Quality Factor ETF (IQLT, $38.58) provides diversified exposure to Europe, Japan and other developed markets while also filtering stocks by the same quality-factor metrics as QUAL.
The 300-stock portfolio is heaviest in developed Europe, which makes up half of the portfolio – and that's without accounting for an additional 14% exposure to the U.K. Japan is another 14% of assets, and the rest of the portfolio is spread across Canada, Australasia and developed Asia.
Both QUAL and IQLT are largely blue-chip funds, with the former's holdings averaging about $150 billion in market cap, and the latter closer to $60 billion. And as is the case for many European funds, IQLT yields more than its American cousin. But it's the attention to reliability and stability that might make IQLT one of the best ETFs for 2022.
iShares MSCI United Kingdom ETF
- Type: International region (U.K.)
- Assets under management: $2.8 billion
- Dividend yield: 2.8%
- Expenses: 0.51%
Here's a fun fact: In roughly three years, Kiplinger has been acquired by not one, but two U.K.-based companies.
And we promise that's not the motivation for this next pick.
While European equities are considered inexpensive at the moment, British stocks are downright cheap.
Mike Bell, global market strategist for J.P. Morgan Asset Management, said during summer 2021 that "U.K. valuations aren't just cheap when compared with other markets. They are also below their long-run average valuation since 1990." And little has changed since then.
"I think regionally the United Kingdom looks quite interesting. It is the cheapest market on a per-growth unit basis globally, and to me I think that there isn't a lot of long-term rationale for that dislocation, and I think that represents an opportunity for positive reversion," adds George P. Maris, co-head of equities, Americas, for Janus Henderson.
The iShares MSCI United Kingdom ETF (EWU, $32.24), then, could be one of the best ETFs to buy for 2022 – at least if Britain equities' value prices finally translate into returns after years of disappointing results.
EWU is a decently balanced collection of 85 stocks that sees six sectors currently weighted in double digits. Consumer staples (20%) is top of the list, but financials, healthcare, industrials, materials and energy all play significant roles in the portfolio. Top holdings include pharmaceutical name AstraZeneca (AZN), consumer products giant Unilever (UL) and spirits maker Diageo (DEO).
The average P/E of an EWU stock is less than 12 right now, and both P/S and P/B are under the category average as well. New investors are also getting twice the S&P 500's yield at 2.8% currently.
Freedom 100 Emerging Markets ETF
- Type: Emerging markets
- Assets under management: $105.5 million
- Dividend yield: 1.1%
- Expenses: 0.49%
Most investors can give you the broad-strokes rundown on what risks they're taking when they chase growth via emerging markets (EMs). But rarely have they experienced as acute – and painful – an example as what China delivered in 2021.
Simply put, China cracked down on publicly traded companies, especially in the tech sector. In April 2021, Beijing forced Jack Ma's Ant Group, the country's largest payments provider, to restructure to more resemble a bank company – and then in September, numerous reports claimed China was planning on breaking apart Ant Group's app Alipay to be broken up. In early December, ride-sharing giant Didi Chuxing was pressured into delisting from the New York Stock Exchange and pursuing a Hong Kong listing. In between, Alibaba (BABA), JD.com (JD) and other online giants were slapped with large antitrust fines.
"I think for investors, this made them realize that they miscalculated the autocracy risk and government intervention risk in EMs," says Perth Tolle, sponsor of the Freedom 100 Emerging Markets ETF (FRDM, $32.76), which looks to sidestep this and other risks in emerging markets that can ultimately stifle economic growth.
You see, FRDM is a departure from the other best ETFs to buy for 2022 in that it's not market cap-weighted or equally weighted … but freedom-weighted.
The ETF's tracking index begins with a selection universe of 26 emerging countries. From there, minimum country-level market-cap requirements must be met. Then, using country-level data from the Cato Institute, Fraser Institute and the Friedrich Naumann Foundation for Freedom, countries are selected and weighted based on 76 different metrics of civic, political and economic freedoms, such as rule of law, freedom of the press, women's freedoms and government interference in private markets.
The result is a much different EM fund than many prominent ETFs that feature China and India heavily. As of late 2021, neither were featured – instead, Taiwan (21%), Chile (16%) and Poland (16%) were tops among 10 countries represented.
The Freedom 100 Emerging Markets ETF's lack of Chinese exposure specifically was a boon in 2021, as many China-specific ETFs lost more than 20% through late in the year, and broad EM funds with heavy EM exposure were dragged to negative returns. FRDM was up 2% with a little more than a week to go in 2021.
"We have always said that freer countries perform more sustainably, recover faster from drawdowns, use their capital and labor more efficiently and have less capital flight," Tolle says. "We got to test the second part (recovering faster) in the latter part of 2020; it passed that test and outperformed broad EM, EM ESG and EM ex-China. But in 2021, we really saw the more basic thesis, which is that personal and economic freedoms set the foundation for growth."
A growing investor realization of these tenets helped the Freedom 100 Emerging Markets ETF more than triple its assets in 2021, to more than $105 million at last check. And entering a 2022 in which many strategists have China as a big, fat question mark, FRDM takes at least one uncertainty off the board.
SPDR Bloomberg 1-10 Year TIPS ETF
- Type: Inflation-protected bond
- Assets under management: $1.1 billion
- SEC yield: -0.15%*
- Expenses: 0.15%
Bond investors are in for some serious challenges in 2022. Central banks all over the world are poised to tighten their monetary policy, and that includes the Federal Reserve here at home.
At its last policy meeting, the Fed said it was going to effectively double the pace of its tapering, which would put the end of its asset purchases in March, rather than mid-2022 as previously forecast. Meanwhile, the latest "dot plot" from December indicates that a majority of the Fed's members believe their benchmark interest rate will climb three times in 2022.
That, as well as expectations for slowing but still-higher-than-pre-COVID inflation, have several strategists recommending Treasury Inflation-Protected Securities (TIPS), which are U.S. government bonds that rise with inflation and decline with deflation.
"Barbelling credit with TIPS could add another real income stream, this time on the defensive side of a bond portfolio," say State Street Global Advisors strategists. "Because TIPS are backed by the full faith and credit of the U.S. government, they have low credit risk. Adding TIPS to a portfolio could help counteract some of the equity risk introduced by overweights to credit."
The SPDR Bloomberg 1-10 Year TIPS ETF (TIPX, $20.98) adds another level of defense by targeting shorter-maturity issues. TIPX's roughly 40 holdings have an average maturity of just less than five years, which is well under the category average of nearly eight years. As a result duration is 4.9 years, versus 6.8 for the category average. (Duration is a measure of bond-fund risk that implies for every percentage-point increase in interest rates, TIPX will decline 4.9%, and vice versa.)
TIPX is a painfully boring entry in our best ETFs to buy for 2022 – you obviously won't mint a fortune sitting in short-duration TIPS. But it should provide a measure of protection against persistent inflation, more than compensating you for the fund's marginally negative current yield.
* 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.
Fidelity High Yield Factor ETF
- Type: High-yield bond
- Assets under management: $304.6 million
- SEC yield: 4.2%
- Expenses: 0.45%
If investors do want to squeeze yield out of the fixed-income market in 2022, several strategists suggest you go big or go home. That means delving into high-yield debt (read: "junk").
"One area of fixed income that is in reasonable shape is high yield," says Capital Group Fixed Income Portfolio Manager Kirstie Spence. "Although it's at the tighter end of its historical range, the yield is still a very substantial pickup both to investment-grade corporates, and also to U.S. Treasuries."
Furthermore, adds Gene Tannuzzo, global head of fixed income at Columbia Threadneedle, "We believe 2022 will be a strong year for 'rising stars' as many high-yield companies achieve investment-grade status. In an environment where price appreciation appears muted, rising star candidates could represent a rare opportunity for gains. Risk premiums between BB- and BBB-rated bonds still offer value and prices could rise as investors anticipate higher ratings."
However, Tannuzzo says, "it takes targeted fundamental credit research to identify these favorable credit stories ahead of ratings agency action." Thus, investors might be best-served with an actively managed touch – putting Fidelity High Yield Factor ETF (FDHY, $54.57) among our top ETFs for 2022.
Michael Cheng, who has served as lead manager since inception in June 2018, oversees a portfolio of some 425 below-investment-grade debt issues. Credit quality here is better than most peers, with 45% of assets in BB-rated bonds (the highest grade of junk), and another 48% in B-rated debt. Just 5% is in below-B bonds, versus the category average of nearly 15%.
This positions FDHY to potentially enjoy gains from "rising star" bonds while still offering an attractive SEC yield of more than 4% at present.
VanEck Preferred Securities ex Financials ETF
- Type: Preferred stock
- Assets under management: $1.1 billion
- SEC yield: 5.0%
- Expenses: 0.40%
Aside from junk, few other fixed-income categories are offering up yields above inflation. Among them? Preferred stocks.
Companies sometimes issue preferred stocks as another way to raise funds without diluting common-stock shareholders but also without packing on more debt. And they're often referred to as "hybrids" because they share characteristics with both stocks and bonds.
On the one hand, preferred stocks actually represent ownership in the company, and they trade on exchanges just like common shares. However, the income they produce is more like a bond's coupon payment – a set amount rather than a stock's dividend, which can grow over time. Also, preferred stocks tend to trade around a par value, like a bond, so you don't rely on them for growth the way you do common shares.
And the "preferred" moniker? That's because preferred shareholders actually have priority over common shareholders. A company can't cut the dividend on preferreds until they cut the commons. And in some cases, dividends are cumulative – if the company stops paying for any reason, they still must eventually pay all owed dividends to preferred shareholders.
Several ETFs provide access to preferreds, but among the best is the VanEck Preferred Securities ex Financials ETF (PFXF, $21.74).
PFXF was created in 2012, in the wake of the Great Recession, as one of several "ex-financials" funds meant to avoid the risks of the troubled sector. You see, most preferred funds are teeming with preferred stocks issued by banks, insurers and other financial-sector stocks – which naturally cratered as the financial crisis sent some operators into bankruptcy and sent others into existential jeopardy.
VanEck Preferred Securities ex Financials ETF refuses to hold any such preferreds. Instead, its 127 holdings come from industries such as utilities (28%), residential and commercial REITs (17%) and telecom (9%).
It's a safe assumption most investors don't think another financial crisis is imminent. But VanEck's fund is still relevant thanks to higher yields and lower costs compared to most of its peers. That has led it to outperform against most of the other major preferred funds over every significant time frame.
Abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF
- Type: Broad commodities
- Assets under management: $72.4 million
- Dividend yield: 1.0%
- Expenses: 0.29%
One last play to address both inflation and a return to the recovery is hard commodities, which the Wells Fargo Investment Institute (WFII) is bullish on heading into 2022.
"We are expecting another good year," says John LaForge, head of global real asset strategy for WFII. "The midpoint of our 2022 Bloomberg Commodity Index (BCOM) target is 15% higher than last Wednesday's closing price. If hit, this would be the third straight year of double-digit gains for the BCOM."
In short, Wells Fargo believes that commodities began a new bull super cycle – a period during which commodity prices largely move together in sync – in March 2020. Bull cycles average 17.5 years with an average 247% gain, and the current bull cycle has gained just 63% and is only 1.7 years old.
"To gain exposure to the Commodities bull super cycle, we recommend a broad basket of commodities," LaForge says, as "bull super cycles have been known to lift most commodity prices.'
Enter the Abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF (BCD, $30.13). BCD provides investors with access to the performance of futures contracts for nearly two dozen commodities, from natural gas to aluminum to corn. Currently, exposure is heaviest in energy commodities (36%), followed by agriculture (28%), precious metals (17%), industrial metals (14%) and livestock (5%).
And as the name suggests, Abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF doesn't send out a K-1 tax form each year, which is a blessing for investors that don't want the additional tax complexity. Instead, you'll get a Form 1099.
ProShares Short S&P500 ETF
- Type: Inverse stock
- Assets under management: $1.3 billion
- Dividend yield: 0.0%
- Expenses: 0.88%
"Always have an escape plan."
Desmond Llewellyn's final line as Q in the James Bond franchise might have served many investors well during the 2020 COVID bear market. One of the best ways to avoid deep losses in stocks, of course, is to not be long stocks.
But that's counterintuitive to what most of us are trying to accomplish. Long term, it makes sense for most investors to stick with a buy-and-hold plan through thick and thin, collecting dividends along the way. If you hold high-quality stocks, they'll likely bounce back after any market downturn. Fleeing to cash, meanwhile, not only could keep you from enjoying a rebound if you time the market wrong, but could also deprive you of attractive "yields on cost" (the actual dividend yield you receive from your initial cost basis).
That said, the point of this list is to make sure you're prepared for whatever the market sends your way. And if you're both convinced a downturn is ever coming, and you want to actively protect your portfolio against it, one way you can do so without jettisoning your portfolio is to put a bit of money to work in a simple market hedge.
The ProShares Short S&P500 ETF (SH, $13.97), most simply put, goes up when the market goes down. More specifically, it provides the inverse daily return of the S&P 500, which means if the S&P 500 declines by 1% on Monday, SH will gain 1% (minus expenses, of course).
This is not one of the best ETFs to buy and hold throughout 2022, and certainly not forever. Instead, it's a tool to put to use, investing a small percentage of your portfolio in it if your market outlook is grim. By doing so, you can offset some of the losses that your long holdings might incur during a down market – like many investors were rewarded for doing in February 2020 when it became apparent that COVID-19 was going to hit the U.S. hard.
The natural risk is that if you're wrong, and stocks go up, your portfolio's gains won't be as robust as they might have been.
Again, if you're a buy-and-hold investor, you'll do great just staying the course. But if you revel in being more involved and want to fade potential downside in the future, SH is a straightforward, effective hedge.