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All Contents © 2018The Kiplinger Washington Editors
By the editors of Kiplinger's Personal Finance
| August 2, 2017
These days, investors can choose from more than 2,000 exchange-traded funds (ETFs), so many that picking a few good ones can be daunting. More than a dozen funds track versions of the S&P 500 alone. Plus, scores of ETFs aim to beat the markets by carving out certain types of stocks or bonds, or by emphasizing things such as share-price momentum—anything to give them an edge over traditional indexes.
With an eye toward low fees, we've picked The Kiplinger ETF 20 to help you reach your investing goals. Our selections range from funds that give you a broad exposure to the stock market to narrower slices that can help you fill specific gaps in your portfolio.
Data is as of August 2, 2017. All data is from Morningstar except yields, which were provided by XTF.com. Click on symbol links in each slide for current share prices and more.
Share price: $248
Expense ratio: 0.04%, or $4 per $10,000 invested
Trades commission-free at: Fidelity, Firstrade, TD Ameritrade
Standard & Poor’s 500-stock index is synonymous with the U.S. market and is the benchmark against which most large-cap managers are judged. Stocks like ExxonMobil (XOM), Apple (AAPL) and Bank of America (BAC) dot its holdings.
iShares Core S&P 500 has a key structural advantage. The classic S&P 500 index ETF — the SPDR S&P 500 ETF Trust (SPY) — is structured as a unit investment trust. As such, dividends from the SPY’s underlying holdings must be held as cash until they are distributed to shareholders. As an ETF, IVV is able to immediately reinvest its dividends, improving its return.
Share price: $175
Expense ratio: 0.07%
iShares Core S&P Mid-Cap is the best pure play on midsize-company stocks, which offer almost all of the advantages of small caps but with much less risk. Standard and Poor’s excludes financially weak midcaps from this index, a culling that has enabled the index to outperform other midcap indexes over the past 10 years.
Share price: $37
Expense ratio: 0.57%
Trades commission-free at: --
PowerShares Dynamic Large Cap Value tracks an enhanced index of undervalued stocks. Stocks in the ETF rank strongly on measures such as earnings momentum, balance-sheet strength and a history of raising dividends. The highest-scoring stocks get the most weight. The result is a collection of 50 stocks that looks somewhat different from the fund’s bogey, the Russell 1000 Value index. The ETF’s top 10 holdings include Citigroup, Oracle and Wal-Mart Stores, none of which crack the Russell index’s top 10. PowerShares rejiggers the holdings every three months to reflect changes in scores. One downside of all this activity: Annual fees are relatively steep for an ETF.
Share price: $112
Expense ratio: 0.13%
Trades commission-free at: TD Ameritrade, Vanguard
Vanguard FTSE All-World ex-US Small-Cap tracks an index of about 3,460 small- and medium-capitalization stocks in both developed and emerging markets. Small-cap stocks tend to be riskier than large caps. But this ETF hasn’t been much more volatile than its large-cap counterpart. And it has edged foreign large caps over the past three years by an average of 0.9 percentage-point per year.
Share price: $103
Expense ratio: 0.20%
Trades commission-free at: Vanguard
Although value stocks are always, by definition, cheaper than growth stocks, the valuation gap between the two is among the largest it has been since 1942. Value stocks tend to beat growth stocks when they are this cheap, making Vanguard Russell 2000 Value more compelling than a broad small-cap fund.
Share price: $54
Expense ratio: 0.11%
Vanguard Total International Stock, which holds some 6,000 stocks, gives you the world outside the U.S. Because it weights stocks by market value, the biggest companies dominate the fund; the median market value of its holdings is $24 billion. Overall, the fund has about 83% of its assets in developed markets, led by Japan at 17%. Emerging markets rounded out the total, with 19% in countries such as China, India and South Korea.
Share price: $127
Expense ratio: 0.04%
Vanguard Total Stock Market gives you the entire U.S. stock market—large, midsize and small companies. The fund tracks the CRSP U.S. Total Market Index, which includes some 3,600 stocks—making it much broader than the S&P 500. Still, large companies dominate the index, and the fund’s return rarely deviates from the S&P by more than one percentage point or so in any calendar year.
Share price: $46
Trades commission-free at: Schwab
Schwab US Dividend Equity invests only in companies that have paid dividends every year for at least 10 years, that boast a market value of at least $500 million, and whose stocks have significant daily trading volume. Finally, only those companies with the best relative financial strength—as measured by four factors, including return on equity and five-year dividend growth rate—make the cut.
Share price: $42
With real estate recovering from the Great Recession, property-owning real estate investment trusts (REITs) have enjoyed healthy gains. Schwab US REIT holds about 100 real estate investment trusts—landlords that own properties such as apartment buildings, hotels, malls and offices. REITs make money primarily from rental income. They’re also cash machines for investors, partly because Uncle Sam requires them to distribute at least 90% of pretax income as dividends. This is the only REIT ETF in the Kiplinger ETF 20.
Share price: $79
Expense ratio: 0.08%
As its name indicates, Vanguard High Dividend Yield focuses more on generating high income than on dividend growth. After excluding REITs and small-cap stocks, the Vanguard ETF takes the 50% of dividend payers with the highest yields and weights them by market cap.
Share price: $49
Expense ratio: 0.48%
Trades commission-free at: E*Trade
WisdomTree, one of the leading providers of smart-beta ETFs, creates indexes for all of its funds. WisdomTree International LargeCap Dividend tracks one that captures the 300 biggest developed-market companies by market value and ranks them by the amount of dividends each firm paid over the previous 12 months.
Share price: $25
Expense ratio: 0.10%
iShares iBonds Dec 2021 Term Corp holds hundreds of high-quality corporate bonds and we expect it to hold up well in a rising-rate environment (bond prices generally move in the opposite direction of rates). Stick with the ETF until its termination in 2021 and you should get back your original investment, less annual fees of 0.10%.
Expense ratio: 0.14%
Financial Select Sector SPDR holds commercial banks as well as insurers, financial-services firms and investment banks, a sector that's sensitive to changes politicians in Washington might make to both regulations and interest rates.
But its top holding is Berkshire Hathaway (BRK-B), run by Warren Buffett. Though Berkshire’s big insurance unit gives it a lot of financial exposure, the company has stakes in everything from food products to railroads. No matter how the political winds blow in Washington, Berkshire should thrive.
Share price: $174
Expense ratio: 0.40%
If you want the long-term growth of health care stocks but worry about a rough landing for high-flying biotech stocks, look no further. Guggenheim S&P 500 Equal Weight Health Care takes the 61 health care stocks in the S&P 500 and weights them equally. Biotech stocks represent 16% of the fund’s assets, compared with 38% in the typical health care ETF.
Share price: $92
Expense ratio: 0.15%
iShares Edge MSCI USA Momentum Factor holds a big slug of tech. But it holds an array of other stocks with good price momentum. If tech keeps surging, the iShares ETF will benefit. But the fund won’t lose as much as a pure tech ETF if the sector fizzles out.
Share price: $45
iShares Global Infrastructure holds mostly utilities, pipeline firms and operators of other types of infrastructure, such as shipping ports, toll roads and airports, in both the U.S. and developed countries abroad. Holdings range from Transurban Group, Australia’s largest operator of toll roads, to Italy’s Atlantia, which manages Rome’s airport as well as toll roads in several countries. In the U.S., the ETF owns pipeline stocks such as Kinder Morgan, along with conglomerates such as Macquarie Infrastructure, which runs private-airport services, fuel terminals, and gas utilities in Hawaii and New Jersey.
These aren’t fast-growing businesses. But they generate steady income and pay dividends that should climb as their revenues rise. Two drawbacks: The fund’s annual expense ratio is 0.48%. That’s high compared with ETFs that track traditional indexes, such as the S&P 500. And because utilities represent about 40% of the fund’s holdings, the ETF could suffer if interest rates were to rise sharply.
Share price: $47
iShares Mortgage Real Estate Capped holds real estate investment trusts that buy pools of mortgages and other types of real estate debt. Mortgage REITs borrow at short-term interest rates and use the proceeds to buy long-term debt.
The risk is that short-term rates could climb while long-term rates remain flat or edge down, raising financing costs and squeezing the firms’ profits. That has been happening a bit. But if the trend doesn’t accelerate, which we don’t think it will, the stocks should hold up, and the ETF should be able to maintain its quarterly payout of 30 cents per share.
Share price: $107
Expense ratio: 0.55%
PIMCO Active Bond is, as its name suggests, an actively managed ETF (most ETFs merely seek to match an index). The ETF is run like Pimco’s flagship mutual fund, Pimco Total Return (PTTDX). The ETF holds $2.1 billion in assets; the mutual fund, which was once the biggest in the land, contains $73 billion. Pimco has seen a good bit of turmoil in past years with the resignation of co-founder Bill Gross, but we think the firm still has a lot of talent.
Share price: $23
Expense ratio: 0.65%
PowerShares Senior Loan Portfolio holds loans made by banks to heavily indebted firms with poor credit ratings. These junk-rated borrowers are charged "floating" interest rates that are typically tied to a short-term benchmark: the London Interbank Offered Rate, or LIBOR. When LIBOR rises above a certain level, rates on these loans bump up, helping them hold their value better than bonds.
Share price: $30
Expense ratio: 0.35%
VanEck Vectors Fallen Angel High Yield Bond holds IOUs originally issued with investment-grade ratings but subsequently downgraded to junk status. If issuers of these "fallen angels" can recoup their investment-grade status, which happens on occasion, the bonds should rally, supplementing the fund’s interest income.
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