5 Top ETFs to Build Wealth Over the Long Term
Low costs, broad diversification, ample liquidity and disciplined portfolio construction characterize top ETFs to build wealth over the long term.
In July, Morningstar published a column, "These 15 Funds Cost Investors Billions Over the Last Decade." The list was revealing. Many of the biggest wealth destroyers were inverse ETFs, products designed to deliver one, two or three times the inverse daily return of a market benchmark.
Among the funds highlighted were ETFs betting against semiconductor stocks, the S&P 500 and the Nasdaq-100, often with leverage. Given the strong performance of U.S. equities over much of the past decade, these strategies proved costly for investors.
Also appearing on the list were leveraged long ETFs tied to particularly volatile non-equity assets. Products seeking to triple the daily return of long-term 20-year U.S. Treasury bonds and natural gas futures struggled as their underlying markets performed poorly, with the effects of daily leverage compounding further eroding long-term returns.
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The list also included several thematic ETFs. Unlike broad market index funds, thematic ETFs focus on a narrow investment idea or emerging trend that cuts across industries. Morningstar's list included funds concentrated in Chinese internet companies, as well as two innovation-focused ETFs from ARK Invest.
While every investment carries risk, the list also highlights several characteristics that investors may wish to avoid when building long-term wealth.
Many of the funds charged relatively high fees, concentrated their holdings in a small number of stocks or sectors or relied on leverage and derivatives such as options that were designed for short-term trading rather than long-term compounding.
Finding ETFs with a greater likelihood of building wealth over time can therefore be as much about avoiding these characteristics as identifying attractive investments.
What does it mean to build wealth over the long term?
For most investors, the best chance of building wealth over the long term is by owning equities. The reason is the equity risk premium, the additional return that stocks have historically delivered over lower-risk assets such as Treasury bonds and cash.
Share prices fluctuate, recessions occur and companies can fail. Investors are compensated for accepting those risks over long periods.
More importantly, however, the stock market represents ownership in thousands of companies.
Collectively, those businesses strive to sell more products and services to more customers, expand into new markets, improve productivity and earn higher profits.
When you're a shareholder, those profits accrue to you in several ways. Companies can repurchase their own shares, and a stock buyback increases your proportional ownership.
They can distribute profits as dividends, reinvest in new projects, acquire other businesses, reduce debt or simply accumulate cash to strengthen their balance sheets for future opportunities or economic downturns.
This only works consistently, however, if you are sufficiently diversified. A well-diversified portfolio should own companies from countries around the world, represent all 11 sectors recognized by S&P Global and include large, medium and small businesses.
Diversification reduces the impact that any one company, industry or country can have on your long-term outcome.
Even so, investors should remember that the equity risk premium is not earned every year, or even every decade.
There have been extended periods, such as from 1999 through 2009, when stocks underperformed bonds and, after accounting for inflation, generated disappointing real returns.
Building wealth through equities is rarely a straight line. It's a process of compounding over many years rather than getting rich quickly.
How to use ETFs to build wealth over the long term
Simply staying invested in equities is only half of the journey. The remaining portion comes down to a handful of good investing habits.
First, keep fees as low as possible. Every dollar paid in management fees is one less dollar left to compound over time. Even seemingly small differences in expense ratios can have a meaningful impact when compounded over decades.
Second, reinvest your dividends whenever possible. Dividends have historically accounted for a significant portion of total equity returns. Reinvesting those cash payments allows you to purchase additional shares, which in turn generate future dividends of their own, creating a compounding snowball effect.
Third, pay attention to taxes. Dividend distributions received in taxable accounts generally create taxable income, and selling ETF shares can trigger capital gains taxes.
Whenever possible, investors should take advantage of tax-advantaged accounts for long-term investments. In taxable accounts, avoid unnecessary trading and allow capital gains to remain unrealized.
Finally, low costs, broad diversification, ample liquidity and disciplined portfolio construction have historically stacked the odds more favorably for investors.
Based on these factors, here are five ETFs that stand out for their ability to build wealth over the long term.
Vanguard Total World Stock ETF
- Inception date: June 2008
- Expense ratio: 0.06%
- Assets under management: $77.6 billion
- 30-day median bid-ask spread: 0.01%
If building wealth over the long term is largely about capturing global economic growth, then few ETFs accomplish that as comprehensively as the Vanguard Total World Stock ETF (VT).
Rather than attempting to identify the next winning country, sector or stock, the VT simply owns nearly the entire investable global stock market. That removes many of the active decisions investors often get wrong.
The ETF tracks the FTSE Global All Cap Index, providing exposure to more than 10,000 stocks across the U.S., developed international markets and emerging market economies.
The portfolio spans all 11 sectors and includes large-cap stocks, as well as mid caps and small-caps. Each holding is weighted by market cap, allowing the market itself to determine how much each company should represent.
Despite this enormous portfolio, VT is remarkably inexpensive. Its expense ratio is just 0.06%, meaning a $10,000 investment costs approximately $6 annually in fund expenses.
The strategy is also highly efficient. Because VT already owns virtually the entire investable global equity universe, relatively few securities need to be added or removed from the index each year. Portfolio turnover is just 3.4%, reducing unnecessary trading within the fund.
Geographic composition also evolves automatically. Approximately 62% of assets are invested in U.S. companies, reflecting the strong performance of the U.S. stock market over recent decades.
However, those allocations are not fixed. If another region, whether China, India, Europe or another market, grows to represent a larger share of global equity market capitalization, VT will naturally increase its exposure over time without requiring investors to make any tactical allocation decisions.
For long-term VT investors, the job is refreshingly simple: Contribute regularly, reinvest distributions and stay the course while the ETF continuously adapts to changes in the global economy. Over the last 10 years, VT has delivered a 12.8% annualized total return before taxes.
Learn more about VT at the Vanguard provider site.
State Street SPDR Portfolio MSCI Global Stock Market ETF
- Inception date: February 2012
- Expense ratio: 0.08%
- Assets under management: $1.7 billion
- 30-day median bid-ask spread: 0.11%
On paper, the State Street SPDR Portfolio MSCI Global Stock Market ETF (SPGM) is somewhat less compelling than VT. It has a shorter operating history, significantly fewer assets under management, a slightly higher expense ratio and a wider bid-ask spread, making it somewhat more expensive to trade.
For investors simply looking for a single global equity ETF, VT generally has the edge. That said, long-term investors, including those who already own VT, may still find SPGM worth keeping on their watch list. The primary reason is tax-loss harvesting.
During a market downturn, an investor holding VT in a taxable brokerage account may choose to sell shares at a loss, realizing a capital loss that can be used to offset capital gains and, if unused, carried forward to future tax years. proceeds can then be reinvested into SPGM without sitting 30 days on the sidelines.
This approach may also avoid the IRS wash sale rule because, despite their similar investment objectives, the two ETFs track different underlying indexes. VT follows the FTSE Global All Cap Index, while SPGM tracks the MSCI ACWI Investable Market Index.
Although the portfolios have substantial overlap, they are based on different benchmark methodologies and therefore may not be considered "substantially identical" under current IRS guidance.
Investors with questions about their specific circumstances should consult a qualified tax professional or financial adviser before implementing a tax-loss harvesting strategy.
Learn more about SPGM at the SPDR provider site.
iShares MSCI World ETF
- Inception date: January 2012
- Expense ratio: 0.24%
- Assets under management: $7.9 billion
- 30-day median bid-ask spread: 0.07%
It's important to remember that the definition of the "world stock market" depends on the benchmark an ETF tracks. Some global indexes include small-cap stocks, while others do not. Likewise, some include emerging markets, whereas others are limited exclusively to developed economies.
Over long investment horizons, these differences can produce meaningfully different results. The reason these benchmarks coexist is that investors have different preferences.
When it comes to global diversification, some investors are hesitant to own emerging markets such as China, India and Brazil. Common concerns include higher volatility, geopolitical tensions, regulatory uncertainty and currency risk.
Whether those concerns ultimately prove justified is less important than choosing an investment strategy you can stick with through both good and bad markets.
If exposure to emerging markets is likely to cause you to abandon a globally diversified portfolio during periods of underperformance, a developed-markets-only approach may be the more practical choice.
The iShares MSCI World ETF (URTH) represents one such compromise. URTH tracks the MSCI World Index, which provides exposure to the U.S., Canada and other developed economies, including Japan, the UK, France, Switzerland, Germany, Australia and the Netherlands.
Compared with VT, the portfolio is less diversified, holding roughly 1,200 large- and mid-cap stocks.
This approach has worked in investors' favor over the past decade. Maintaining a heavier allocation to U.S. equities helped generate a 10-year annualized total return of 13.4%, outperforming VT despite charging a meaningfully higher expense ratio.
Learn more about URTH at the iShares provider site.
Dimensional World Equity ETF
- Inception date: September 2023
- Expense ratio: 0.24%
- Assets under management: $1.6 billion
- 30-day median bid-ask spread: 0.11%
Index investing has earned its reputation for a reason. By tracking a benchmark rather than attempting to outguess the market, index ETFs typically offer low fees, broad diversification and excellent tax efficiency. But active ETFs have closed much of that gap.
The Dimensional World Equity ETF (DFAW) is a good example. Despite its relatively short track record, the ETF is managed by Dimensional Fund Advisors, a firm with decades of experience in factor-based investing.
Rather than weighting companies purely by market cap, factor investing systematically emphasizes characteristics that academic research has historically associated with higher expected returns. In Dimensional's case, that means tilting the portfolio toward smaller companies, value stocks and higher profitability.
DFAW is not an actively managed ETF in the traditional stock-picking sense. Dimensional uses its own quantitative models to determine which securities to own and when to rebalance them.
The firm applies its own rules-based process with the goal of retaining many of the benefits of indexing, including diversification, transparency and relatively low turnover.
Its approach seeks to avoid drawbacks of traditional indexes, such as predictable reconstitutions that can invite front-running and concentration that naturally develops in market cap-weighted benchmarks. The ETF is also competitively priced, charging a 0.24% expense ratio, identical to URTH.
While its live performance history is understandably limited following its 2023 launch, DFAW has gotten off to a strong start. For the one-year period ending June 30, the fund generated a total return of 25.3%, outperforming the MSCI All Country World Investable Market Index's return of 24.2%.
Learn more about DFAW at the Dimensional provider site.
Avantis All Equity Markets ETF
- Inception date: September 2022
- Expense ratio: 0.23%
- Assets under management: $1.1 billion
- 30-day median bid-ask spread: 0.11%
One potential risk of active management is style drift. An ETF's investment approach can gradually evolve as portfolio managers leave the firm or the quantitative models underlying the strategy are updated.
Over time, these changes can result in a portfolio that differs meaningfully from what investors originally purchased, with corresponding effects on long-term performance.
The best defense against style drift is staying informed. Investors should periodically review a fund's prospectus, manager commentaries and shareholder reports to ensure the ETF continues to follow the investment philosophy they originally intended to own.
Another practical approach is to diversify across multiple active managers rather than rely on a single firm's process. Competing directly with Dimensional in this space is Avantis Investors.
Like Dimensional, Avantis employs a transparent, quantitative active investment process designed to preserve many of the advantages of indexing, including diversification, low turnover and transparency. The strategy also tilts toward many of the same factors, notably value, size and profitability.
The Avantis All Equity Markets ETF (AVGE) is Avantis' global equity offering, and it's constructed as a fund of funds. Its expense ratio is comparable to DFAW, making it another competitively priced option for investors seeking an actively managed global portfolio.
For the three-year period ending June 30, AVGE delivered an annualized total return of 20.4%, outperforming the MSCI All Country World Investable Market Index, which returned 19.5% annualized over the same period.
Learn more about AVGE at the Avantis provider site.
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