The 20 Best ETFs to Buy for a Prosperous 2020
Don't stock-pick your way through what could be a nauseating presidential election year. These 20 best ETFs to buy for 2020 cover a wide range of plays for numerous objectives.
All bets are off for 2020. We could talk about any number of potential growth catalysts or looming hurdles for the new year, but overshadowing them all is the chaos machine of the presidential election. The best ETFs to buy for 2020, as a result, are designed to take advantage of feasible political outcomes, calmly weather the storm or barrel forward regardless of what the new year brings.
That's no prophecy of utter doom and gloom, mind you. Indeed, there are plenty of pockets of optimism to be found.
2019's slowdown in worldwide economic growth might have kept stocks from roaring even louder than they did, but Morgan Stanley believes global GDP growth will rebound in 2020 – a potential driver for the market. FactSet, meanwhile, reports that the new year's estimated earnings growth rate for the S&P 500 Index should come in at 9.6%, which is above the 10-year average. (Analysts are even more confident, looking for profit growth "just over 10%," according to Kiplinger's 2020 investing outlook.)
That said, even the most hopeful of S&P 500 targets for 2020 call for roughly 10%-11% returns – most are closer to the 5%-7% range, and a few are calling for flat performance or worse. So while you do want to anchor your portfolio with a few broad, go-anywhere funds, many of the best ETFs for the year ahead will have to attack specific slices of the market.
Here are the 20 best ETFs to buy for 2020. This is an intentionally wide selection of ETFs that meet a number of different objectives. We don't suggest investors go out and stash each and every one of these funds in their portfolio; instead, read on and discover which well-built funds best match what you're trying to accomplish, from buy-and-hold income plays to high-risk, high-reward shots.
Data is as of Dec. 29. Yields represent the trailing 12-month yield, which is a standard measure for equity funds.
Vanguard S&P 500 ETF
- Type: Large-cap blend stock
- Market value: $130.9 billion
- Dividend yield: 1.9%
- Expenses: 0.03%, or $3 annually on a $10,000 investment
In March 2019, S&P Dow Jones Indices released its annual report on actively managed funds and their performance against their benchmarks. For the ninth consecutive year, the majority of large-cap funds – 64.49%, to be specific – trailed the S&P 500.
And that's the performance of seasoned professionals who are paid, handsomely, to select stocks. It's ludicrous to expect better from mom-'n'-pop investors who might spend just an hour or two each month reviewing their accounts and researching new potential investments.
Simply matching the market is a respectable outcome.
You can do that with an S&P 500 index fund, and it doesn't get cheaper than the Vanguard S&P 500 ETF (VOO, $296.67).
This basic fund tracks the S&P 500, which is made up of 500 large, mostly U.S.-headquartered companies that trade on American exchanges. And because it captures a wide range of American industries, it's considered an excellent proxy for the U.S. stock market.
That doesn't mean VOO is a perfectly balanced fund. For instance, while the ETF includes stocks from all 11 market sectors, companies from the information technology sector command 23% of its assets. That includes Apple (AAPL) and Microsoft (MSFT), each of which holds a "weight" (the percentage of assets invested in the stock) of more than 4%. Still, like many Vanguard funds, VOO is dirt-cheap, and it does what it's supposed to do well.
Distillate U.S. Fundamental Stability & Value ETF
- Type: Value stock
- Market value: $60.6 million
- Dividend yield: 0.3%
- Expenses: 0.39%
For 2019's best ETFs list, we highlighted a little-known, brand-new fund from Chicago-based fundamental value investment manager Distillate Capital: the Distillate U.S. Fundamental Stability & Value ETF (DSTL, $31.09), which launched on Oct. 23, 2018.
It easily earned a repeat spot among the 20 best ETFs to buy for 2020.
DSTL generated a return of 36.9% with a couple days left to go in 2019, handily beating the S&P 500 by 5 percentage points, and clobbering value funds – like its 11-percentage-point drubbing of the Vanguard Value ETF (VTV) – amid another year that saw value underperform growth.
But the reason to like DSTL in 2020 isn't because many market experts are predicting a value comeback. It's because value never truly went away.
"We think value works. We don't think it ever really stopped working," says Thomas Cole, CEO and co-founder of Distillate Capital. "What has stopped working are the metrics that legacy value investors have been most associated with."
While many funds of its kind rely on metrics such as price-to-earnings (P/E) or price-to-sales (P/S) to determine value, DSTL focuses on free cash flow (the cash profits left over after a company does any capital spending necessary to maintain the business) divided by its enterprise value (another way to measure a company's size that starts with market capitalization, then factors in debt owed and cash on hand). This "free cash flow yield" is much more reliable than valuations based on earnings, Cole says, given that companies tend to report multiple types of profits – ones that comply with generally accepted accounting principles (GAAP), but increasingly, ones that don't, too.
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, at the moment, is a portfolio heavy on tech stocks (32%), industrials (19%) and health care (18%).
Legg Mason Low Volatility High Dividend ETF
- Type: Low-volatility dividend stock
- Market value: $886.2 million
- Dividend yield: 3.6%
- Expenses: 0.27%
The gut-wrenching plunge in Q4 2018 sparked a nearly yearlong run in low-volatility ETFs. If we do get a return to that same kind of nauseating volatility, whether it's courtesy of the 2020 presidential election or sparked by other catalysts, expect another popularity surge in "low-vol" products.
One of the best ETFs for delivering "smoother" returns than the broader market is the Legg Mason Low Volatility High Dividend ETF (LVHD, $34.20) – a portfolio that ranges between 50 and 100 stocks selected not just because of their relatively lower volatility, but also their ability to generate income.
Here's how the sausage is made: LVHD starts with a universe of the 3,000 largest U.S. stocks, which ends up including large, midsize and even some small companies. It then screens for profitable companies that can pay "relatively high sustainable dividend yields." It then scores those stocks higher or lower based on price and earnings volatility. From there, it caps any stock's weight at rebalancing at 2.5%, and any sector's weight at 25% (except real estate investment trusts, or REITs, which can never exceed 15% of the fund). The list of stocks is updated every year, and their weight is rebalanced every quarter.
Legg Mason Low Volatility High Dividend ETF's top three sectors won't shock anyone: utilities (26%), real estate (16%) and consumer staples (14%). Top holdings include an array of blue-chip dividend payers including pharma giant Merck (MRK), PepsiCo (PEP) and Verizon (VZ).
This is a buy-and-hold fund for extremely conservative investors worried about volatility and/or a broader pullback. LVHD, like many low-vol funds, typically will shine during flat or down markets, but get left back when the bull charges. Consider that in Q418, it beat the VOO, -5.4% to -13.5%, on a total-return basis (price plus dividends). But in Q419, to date, it has underperformed the VOO, 2.7% to 9.4%.
iShares Edge MSCI Min Vol USA Small-Cap ETF
- Type: Small-cap minimum-volatility stock
- Market value: $481.9 million
- Dividend yield: 1.5%
- Expenses: 0.20%
One odd aspect about the 2019 bull run is that small-cap stocks – which often benefit most from confident investors bidding the market higher – were laggards for most of the year. The Russell 2000 Index of small-cap stocks was on pace to finish 2019 more than 5 percentage points back of the S&P 500.
But 2019 wasn't a normal year. The market appeared to rally in spite of numerous headwinds, such as tariffs levied by the U.S. and China, weak American corporate earnings, global economic growth and vacillating energy prices. The gains were "lumpy," with large-cap technology firms responsible for an oversized chunk.
Interestingly, small-cap stocks are now something of a value proposition. During Q4 2019, BofA Merrill Lynch senior U.S. equity strategist Jill Carey Hall wrote that "the relative P/E today suggests that small caps should lead large caps over the next decade."
One way to invest in small caps, while targeting a little more stability than your average small-company ETF, is the iShares Edge MSCI Min Vol USA Small-Cap ETF (SMMV, $35.42).
Whereas low-vol funds typically prioritize low volatility first with a limited amount of regard for sector diversification, "min-vol" funds tend to take a base index, then try to pick the least volatile stocks while maintaining a similar makeup (for instance, sector weights, country weights) as that base index.
The SMMV is made up of roughly 390 stocks, with no stock currently accounting for any more than 1.57% of the fund's assets. Top holdings at the moment include Royal Gold (RGLD), which holds precious-metals royalty interests; mortgage REIT Blackstone Mortgage Trust REIT (BXMT); and Wonder Bread and Tastykake parent Flowers Foods (FLO). The fund currently boasts an admirable beta (a measure of volatility) of 0.68 – anything under 1 is considered less volatile than the broader market.
Utilities Select Sector SPDR Fund
- Type: Sector (Utilities)
- Market value: $11.4 billion
- Dividend yield: 3.0%
- Expenses: 0.13%
The biggest X-factor for the stock market in 2020 is the presidential election cycle. That includes the ongoing Democratic primaries, where it's still unclear who the party's candidate will be. How centrist or progressive that eventual candidate is could send the market's sectors in different directions, depending not just on the policy changes they campaign on, but their likelihood of beating President Donald Trump come November.
Still, market analysts are at least starting to compile potential outcomes based on who wins the presidency and how Congress shapes up.
RBC Capital, for instance, drew up an outlook based on a potential situation under which Sen. Elizabeth Warren, largely considered a more progressive Democratic candidate, wins the presidency and Democrats end up controlling both houses of Congress. Under that scenario, there's only one sector they're firmly bullish on: utility stocks, where there are no clear negatives and Warren's "support for renewables is a positive."
The best utilities ETF for 2020 is also the largest: the Utilities Select Sector SPDR Fund (XLU, $64.38), which owns all of the utility stocks in the S&P 500. This is a tight fund of just 28 current holdings, and because they're weighted by size, its largest stocks command a considerable portion of assets. Top holding NextEra Energy is a whopping 13.4% of the fund, and Dominion Energy (D), Southern Co. (SO) and Duke Energy (DUK) are each 7%-plus weights.
XLU isn't just an election play, either. Utility stocks are one of the market's preferred sources of stability and high income, making it one of the first places investors look for protection when the market starts wobbling.
Invesco KBW Bank ETF
- Type: Industry (Financials)
- Market value: $606.4 million
- Dividend yield: 2.3%
- Expenses: 0.35%
In the opposite corner are bank stocks, which could run into a number of hurdles under a number of potential Democratic presidents, but certainly would struggle if a progressive candidate such as Warren wins the presidency and has a full Congress on her side.
RBC outlines a laundry list of risks: "Regulation, restoring Glass Steagall, eliminating student loan debt, cap on credit card interest rates, lending restrictions, making payments infrastructure a public utility, judiciary appointments, higher corporate taxes, preconditions on buybacks."
The flip side? Even signals of a likely Trump victory – not to mention an actual re-election itself – and even partial Republican control of Congress would likely send bank stocks rocketing higher on hopes of another four years of accommodative policy.
The Invesco KBW Bank ETF (KBWB, $58.27) is one of the best ETFs you can buy for this scenario, for a couple of reasons.
For one, it's an expensive way to invest directly in the banking industry. Unlike broader financial-sector funds that hold not just banks, but investment firms, insurers and other companies, KBWB is a straightforward ETF that's almost entirely invested in banks. It is a fairly concentrated portfolio that includes major money-center banks such as Bank of America (BAC) and JPMorgan Chase (JPM), as well as large regionals such as PNC Financial Services (PNC) and KeyCorp (KEY).
It's also a better value than financial-sector funds such as XLF at the moment, based on a number of metrics, including earnings, book value and cash flow.
iShares Evolved U.S. Healthcare Staples ETF
- Type: Sector (Health care)
- Market value: $9.6 million
- Dividend yield: 1.4%
- Expenses: 0.18%
Another sector that that will live and die by political headlines in the year ahead is health care. Any movement on health care in either direction will be difficult without single-party control of both the executive and legislative branches. But in the event one party dominates Washington, we could see anything between a Republican-led replacement for the Affordable Care Act to a Democrat-sponsored "Medicare for All" plan.
If the Democrats manage to gain control of Washington in 2020, expect shockwaves throughout the sector. RBC Capital's analysts say health care stocks are among the most at risk in a Warren/Democratic sweep situation, given the potential for "Medicare for All, eliminating private insurance, support for government negotiation of drug prices/international reference pricing" and other risks.
That said, a Trump win could result in a relief rally across the sector.
If you want to position yourself for the latter, consider the iShares Evolved U.S. Healthcare Staples ETF (IEHS, $32.11). You can learn more about how the Evolved sector ETFs work here, but in short, big data analysis is used to look at how companies actually describe themselves, and companies are placed in sectors based on that data. Evolved sectors sometimes look similar to traditional sectors … and sometimes they have significant differences.
What makes IEHS stand apart is a roughly 80% weight in health care equipment (such as medical devices) and services (such as insurance). Compare that to about 45% in the Health Care Select Sector SPDR Fund (XLV). Medical device makers such as Medtronic (MDT) and Stryker (SYK) face a bit less political risk than, say, pharma companies, and still enjoy robust growth. IEHS also is heavier in health insurers including UnitedHealth (UNH) and Anthem (ANTM), which may breathe a bullish sigh of relief should President Trump win re-election.
John Hancock Multifactor Consumer Discretionary ETF
- Type: Sector (Consumer discretionary)
- Market value: $42.4 million
- Dividend yield: 1.2%
- Expenses: 0.40%
Consumer discretionary stocks – consumer products that aren't necessarily "needs," or at least not needs you have to buy frequently – might thrive no matter who ends up in office.
The U.S. consumer has been confident and spending money under the current administration, and there's little reason to believe that should change if Trump remains in office. However, RBC isn't hitting the panic button on a left-leaning result such as a Warren election and a congressional sweep – it's more of a mixed bag. Many potential Democratic policies (higher minimum wage, the elimination of student debt) could put more money in consumers' pockets, though a war on fronts such as corporate taxes and stock buybacks could hurt publicly traded consumer companies' profitability.
In other words: Consumer discretionary might do fine either way, but it pays to be properly positioned in the "right" stocks.
The John Hancock Multifactor Consumer Discretionary ETF (JHMC, $35.92) tracks a multifactor index that emphasizes "factors (smaller cap, lower relative price, and higher profitability) that academic research has linked to higher expected returns."
Tops among JHMC's 113 holdings are a wide array of companies that benefit from confident consumers: e-tailing giant Amazon.com (AMZN), DIY retailer Home Depot (HD), athletic apparel maker Nike (NKE), Priceline and Booking.com parent Booking Holdings (BKNG) and top fast-food chain McDonald's (MCD).
Among the reasons to like John Hancock's consumer ETF? Cap-weighted funds are drowning in Amazon.com exposure given its massive market value. The Consumer Discretionary Select Sector SPDR Fund (XLY), for instance, dedicates nearly a quarter of its assets to AMZN. Amazon is the top holding in JHMC, too, but at less than 6% of assets, and overall the portfolio is more balanced. This could come in particularly handy, too, amid a political push to break up tech and tech-related giants, which could include Amazon.
Fidelity MSCI Real Estate Index ETF
- Type: Sector (Real estate)
- Market value: $1.0 billion
- Dividend yield: 3.2%
- Expenses: 0.084%
One sector that might not care about the election results one way or the other is real estate. Yes, REITs tend to benefit from low interest rates, and President Trump bangs the Federal Reserve drum on that front every week. But few Democratic policies would pose a significant threat to real estate investment trusts' ability to keep on doing business as usual.
Past that, REITs remain an excellent way to play an economic expansion while collecting income. A reminder: REITs were created by law in 1960 as a way to open up real estate to individual investors. They typically own and operate real estate and are exempted from federal taxes … but in exchange must pay out at least 90% of their taxable income to shareholders in the form of dividends.
The Fidelity MSCI Real Estate Index ETF (FREL, $92.04) is one of the best ETFs to buy to get REIT exposure. This isn't a large fund, at just $1 billion in assets – leader Vanguard Real Estate ETF (VNQ) commands $36.7 billion in assets. But it's the second-cheapest REIT ETF on the market, and it has been among the top performers since its inception in February 2015.
FREL is a wide-ranging portfolio of 171 REITs, though it's fairly concentrated in its largest holdings. Up top are two telecommunications-infrastructure REITs, American Tower (AMT) and Crown Castle International (CCI). It also owns logistics real estate operator Prologis, data-center REIT Equinix (EQIX) and mall giant Simon Property Group (SPG).
iShares PHLX Semiconductor ETF
- Type: Industry (Semiconductors)
- Market value: $2.4 billion
- Dividend yield: 1.1%
- Expenses: 0.46%
A few trends are worth investing in regardless of what the political winds bring.
One of those is the increased need for semiconductors as more aspects of human life are digitized and more products are connected with one another. And semiconductor manufacturing is an industry large enough to warrant a few of its own exchange-traded funds.
But why should they shine in 2020 specifically? Despite what has been a market-beating year for chipmaker stocks, that has come amid fairly disappointing operational results for their underlying companies across 2019. Graphics chipmaker Nvidia (NVDA) is expected to finish the current fiscal year with an 8% decline in revenues, while wireless specialist Qualcomm (QCOM) is staring down a relatively tame 13% improvement.
For several reasons – including downward pressure from the U.S.-China trade war – semiconductor companies as a whole are expected to return to much more vigorous growth in 2020. For Nvidia those expectations rocket to 19% and 23% growth, respectively.
The iShares PHLX Semiconductor ETF (SOXX, $252.32) could end up being one of the best ETFs of 2020 as a result. It's a tight group of 30 companies that design, distribute, make and/or sell semiconductors or semiconductor equipment. While it's weighted by market capitalization, no single stock can represent more than 8% of assets at each rebalancing, which in turn gives smaller industry players a little more representation than they'd get in a true cap-weighted fund.
Nvidia, Qualcomm and Texas Instruments (TXN) are among the top 10 holdings, with each carrying a roughly 8% weight. Other blue chips in the fund include the likes of Intel (INTC), Broadcom (AVGO) and Taiwan Semiconductor (TSM).
Defiance Next Gen Connectivity ETF
- Type: Thematic (5G)
- Market value: $162.4 million
- Dividend yield: N/A*
- Expenses: 0.30%
Another forceful investing trend is the rolling-out of next-gen 5G technology, which started in 2019 but will really get going in earnest over the next few years. 5G will provide faster, more stable digital connections and allow for an explosion in the "internet of things," in which devices from smartphones to toasters communicate with one another. Wintergreen Research projects that 5G markets will grow exponentially, from $31 billion in 2020 to $11 trillion by 2026.
Unsurprisingly, interest in the Defiance Next Gen Connectivity ETF (FIVG, $26.20) – a 5G-centric fund – has blossomed since its inception in March 2019.
Defiance's ETF tracks the BlueStar 5G Communications Index, made up of "US-listed stocks, of global companies that are involved in the development of, or are otherwise instrumental in the rollout of 5G networks." These companies include everything from broadband chipmakers to mobile network operators to cloud computing equipment providers and so much more.
While it can take years for an ETF to build up a following, investors have quickly latched on to FIVG. The fund has exploded from about $2.5 million in assets under management at inception to more than $162 million currently.
* 12-month yield not available; fund launched March 4, 2019.
Robo Global Robotics & Automation ETF
- Type: Thematic (Robotics and automation)
- Market value: $1.3 billion
- Dividend yield: 0.3%
- Expenses: 0.95%
The Robo Global Robotics & Automation ETF (ROBO, $42.31), like FIVG, is a so-called "thematic" ETF that spans multiple sectors/industries to tackle a single trend.
In this case, it's the increased reliance on automation and robotics in the American workplace and beyond.
Every other week, you read a story about how the machines are taking over the world, whether it's medical surgery-assistance robots, heavily automated factories or virtual assistants infiltrating the living room. These make for interesting stories (albeit depressing ones if you're worried about holding onto your job) … but they also make for a fantastic investing opportunity.
The ETF itself holds 91 stocks spread pretty evenly among large, midsize and small-cap companies, and its weight is split roughly 50-50 into two categories. Half the weight goes toward businesses that are benefitting from automation, such as manufacturing and industry (15%), health care (13%) and logistics automation (10%). The other half goes toward the technologies powering these changes, including computing, processing & AI (21%), actuation (11%) and sensing (11%). Holdings include the likes of Japanese robotics giant Fanuc; top health-care stock pick Intuitive Surgical (ISRG), which produces da Vinci Surgical System machines; and German packaging and bottling machine maker Krones AG.
If ROBO sounds familiar, that's because it was on our list of the best ETFs to buy for 2019. It slightly outperformed the market over the subsequent year, and given growth projections for several of the fund's underlying themes, it should be a strong candidate for wider outperformance going forward.
VanEck Vectors Video Gaming and eSports ETF
- Type: Thematic (Video games and e-sports)
- Market value: $57.1 million
- Dividend yield: 0.1%
- Expenses: 0.55%*
Video gaming has gone mainstream in a way that even the most dedicated gamers couldn't have dreamed of decades ago.
"E-sports" – competitive video gaming, for considerable cash prizes, often broadcast via streaming and even cable channels – has become a very real thing. The global e-sports market was expected to close 2019 at $1.1 billion, some 27% bigger than where it finished in 2018.
It's a potentially explosive market going forward. Depending on which research report you consult, annual growth through 2023 could range from 9% (Business Insider Intelligence) to more than 18% (PricewaterhouseCoopers). But there are reasons for caution, including the fact that e-sports aren't nearly as good – yet – at monetizing fans as traditional sports are, and the industry is still trying to figure out how to bring in more casual viewers.
Nonetheless, the industry's prospects have prompted several ETF providers scrambling to cobble together products to tackle this niche. Among them is the VanEck Vectors Video Gaming and eSports ETF (ESPO, $38.27).
As the name implies, ESPO is dedicated not just to eSports, but also the broader video game industry – which is just fine, considering that's a growth market too. GlobalData projects the industry will expand from $131 billion in 2018 to $300 billion by 2025, with technologies such as IoT and 5G pushing new innovations.
ESPO invests in 25 stocks of companies that are mostly involved in producing video games or producing the technology to play them. ESPO's top holdings include the likes of chipmakers Nvidia and Advanced Micro Devices (AMD), as well as game publishers Activision Blizzard (ATVI) and Electronic Arts (EA). One of the ETF's most enticing draws is its 8.6% weighting in Tencent Holdings (TCEHY), which derives a little less than a third of its revenues from video games and e-sports in the burgeoning Chinese gaming market.
This is far from a slam dunk, but like many technological trends, there's plenty of potential reward to go with all that risk.
* Includes 5-basis-point fee waiver.
WisdomTree Global ex-U.S. Quality Dividend Growth Fund
- Type: International large-cap growth and dividend stock
- Market value: $105.3 million
- Dividend yield: 1.9%
- Expenses: 0.58%
"A combination of low valuations and fewer headwinds could make international markets worth exploring in 2020," says Kiplinger's investing outlook for 2020. Indeed, Ed Yardeni, of Yardeni Research, says "Stay Home has outperformed Go Global during most of the current bull market, but Stay Home could lag over the next six to 12 months."
An excellent option for "going global" in 2020 can be found within the ranks of our Kip ETF 20 list of top exchange-traded funds.
The WisdomTree Global ex-U.S. Quality Dividend Growth Fund (DNL, $65.85) is an international growth-stock fund, but one that views dividend programs as a means of identifying high-quality stocks. (Tip: This isn't unusual. "Dividend growth" funds typically are low on yield and instead are concerned with targeting financially secure companies.)
This Kip ETF 20 pick identifies "dividend-paying companies with growth characteristics in developed and emerging equity markets, ex-U.S." Its holdings span more than 30 countries with significant weights in Japan (14%), the U.K. (11%) and Sweden (7%). Top holdings include European Dividend Aristocrat British American Tobacco (BTI), Japanese semiconductor company Tokyo Electron (TOELY) and Norwegian telecom Telenor (TELNY).
While the 1.9% yield isn't going to win over income hunters, this ETF's performance is legit. It has put up a 38.1% return over the past 12 months, putting it ahead of 96% of competing foreign large-growth funds. And over the past three and five years, DNL is a top-20% and top-28% performer, respectively.
iShares Core MSCI Emerging Markets ETF
- Type: Emerging-markets stock
- Market value: $61.8 billion
- Dividend yield: 2.6%
- Expenses: 0.14%
Investors in stocks from emerging markets – less-developed but higher-growth areas of the world such as India, Brazil and, despite its enormous size, China – suffered a disappointing 2019 that saw the group return about half what the S&P 500 did, thanks in large part to slowing economic growth across many of these nations.
But analysts are a bit more optimistic about EMs' prospects for 2020. For instance, Tom Wilson, head of emerging market equities for asset management firm Schroders, writes that the firm expects an "acceleration in economic growth for emerging markets (EM) in 2020." Among the potential drivers: Stabilization in Chinese economic growth, monetary easing around the globe continuing from 2019 into 2020, and at least partial resolution in the U.S.-China trade dispute.
The iShares Core MSCI Emerging Markets ETF (IEMG, $53.99) is a straightforward way to invest broadly across several emerging markets, and it's also one of the cheapest funds, at a token 0.14% in expenses.
IEMG holds almost 2,500 stocks across numerous emerging-market countries on five continents. China, as typically is the case in EM funds, dominates at about 32% of assets. That's followed by large weights in Taiwan (13%) and South Korea (12%), but you do get a little exposure to countries such as Mexico, Saudi Arabia and Thailand, too.
The top 10 holdings are dominated by Asia, however, and include Chinese e-commerce titan Alibaba (BABA), the aforementioned Tencent and Taiwan Semiconductor. Despite the top-heavy weight in information technology, that sector is only No. 2 in IEMG, at 16% of assets. Tops are financials, which make up 23% of the ETF's weight.
The Emerging Markets Internet & Ecommerce ETF
- Type: International industry (Internet and e-commerce)
- Market value: $403.7 million
- Dividend yield: N/A
- Expenses: 0.86%
- The Emerging Markets Internet & Ecommerce ETF (EMQQ, $35.59) blends a couple of approaches from this list of 2020's best potential ETFs. It's a thematic play – in this case, the rise of e-commerce – and it's also an international play, specifically in emerging markets.
EMQQ was a "best ETFs" pick in 2019 despite a disappointing 2018, and it justified itself with a market-beating performance. It returns again this year because the global e-commerce market is still a powder keg –research firm The Freedonia Group projects 12.9% annual expansion through 2023, to $6.7 trillion.
The Emerging Markets Internet & Ecommerce ETF's 75-plus holdings are positioned perfectly to gobble up that growth. Each of these companies deals in fields such as online search, e-commerce, streaming video, cloud computing and other internet businesses in countries such as China, South Africa, India, Russia and Argentina.
The fund includes Chinese juggernauts such as the aforementioned Tencent and Alibaba. But it also holds plays not as well known among U.S. investors, including Germany-based online food ordering company Delivery Hero (DLVHF), South Korean video streaming service AfreecaTV, and Brazilian financial-tech company StoneCo (STNE) – a Warren Buffett stock.
Emerging markets look poised to be unleashed in 2020 amid analysts' projections for a rebound in global economic growth and a thawing of U.S.-China trade relations. If that's the case, consumers in emerging countries should power EMQQ's holdings forward.
Vanguard Short-Term Corporate Bond ETF
- Type: Short-term corporate bond
- Market value: $25.7 billion
- SEC yield: 2.2%*
- Expenses: 0.05%
Investors looking for protection sometimes look to bonds, which typically don't produce the caliber of growth that stocks offer, but do provide decent income and some sort of stability.
A few bond funds make 2020's list of the best ETFs to buy, starting with the Vanguard Short-Term Corporate Bond ETF (VCSH, $80.98).
Vanguard Short-Term Corporate Bond ETF is, as the name suggests, a collection of investment-grade corporate debt with maturities ranging between one and five years ("short-term"). At the moment, the portfolio is a wide assortment of 2,230 debt securities issued by the likes of Apple, Bank of America and CVS Health (CVS). It has an effective duration (essentially a measure of risk) of 2.9 years, which means that a one-percentage-point increase in interest rates would cause the portfolio to lose a mere 2.9%.
Yes, the yield of 2.2% isn't anything to scream about, but VCSH is less about producing huge sums of income over a long time horizon, and moreso about ensuring portfolio protection.
For one, when interest rates on new bonds go higher, the worth of existing bonds with lower yields goes down – but the shorter-term the bond, the less impact any changes in rates can have on the remaining amount of income the bond is scheduled to distribute. Also, when the stock market starts to get rocky, investors often pile into shorter-term bond funds for safety, as their relative stability and small amount of income upside is preferable to volatility and potentially significant losses in stocks.
* 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.
SPDR DoubleLine Total Return Tactical ETF
- Type: Intermediate-term bond
- Market value: $3.3 billion
- SEC yield: 2.7%
- Expenses: 0.55%
Another bond fund to consider is the actively managed SPDR DoubleLine Total Return Tactical ETF (TOTL, $49.04), a Kip ETF 20 component.
Actively managed funds typically will cost more than similar index funds, but if you have the right management, they'll justify the cost. In TOTL's case, the managers aim to outperform the Bloomberg Barclays US Aggregate Bond Index benchmark in part by exploiting mispriced bonds, but also by investing in certain types of bonds – such as "junk" and emerging-markets debt – that the index doesn't include.
What this 960-holding portfolio looks like will change over time as market conditions fluctuate. At the moment, it's 55% invested in residential and commercial mortgage-backed securities, nearly 25% in Treasuries, 8% in emerging-market debt and the rest split among junk bonds, investment-grade corporates and bank loans.
TOTL typically leans toward high quality; roughly two-thirds of the fund's debt has earned the highest possible credit grade, while only 13% of the ETF's holdings are junk-rated. Its duration is longer than VCSH's at four years, but that's still on the short-term side of things.
The SEC yield of 2.7%, like VSCH's, won't bowl anyone over. But it's more than you're getting from the Agg index, and it comes alongside the brainpower of sub-adviser DoubleLine Capital, which will navigate future changes in the bond market.
iShares J.P. Morgan USD Emerging Markets Bond ETF
- Type: Emerging-markets bond
- Market value: 15.5 billion
- SEC yield: 4.4%
- Expenses: 0.39%
If you're looking for a bit more yield, could we interest you in some Turkish and Qatari bonds?
While that sounds dangerous – and could indeed be dangerous if you invested in just one or two debt issues from emerging markets such as Turkey and Qatar – you can reduce your risk by spreading it across several hundred EM bonds while still receiving a respectable amount of income.
The iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB, $114.74) holds roughly 480 debt securities broadly distributed across more than 30 emerging-market nations. Mexico is the highest geographic weight at just 5.5%, followed by Indonesia (4.8%), Saudi Arabia (4.5%), Turkey (3.9%) and Russia (3.9%).
Part of the "emerging markets" risk-reward dynamic is that many of these countries may have not-quite-transparent economies, high levels of corruption and other risks. Despite this, however, less than half of the portfolio is made up of junk-rated debt, yet EMB offers up a yield that's just slightly under pure junk-bond funds such as the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Bloomberg Barclays High Yield Bond ETF (JNK).
Just note that duration is on the long side, at eight years, meaning that a one-percentage-point increase in interest rates would knock EMB down by about 8%. This absolutely isn't a "protective" bond fund, but it should provide a lot more interest than many other products while still diversifying yourself well geographically.
ProShares Short S&P500
- Type: Inverse stock
- Market value: $1.8 billion
- Dividend yield: N/A
- Expenses: 0.89%
Every bull market in the history of stock has had an expiration date.
The final quarter of 2018 technically sent the Nasdaq into bear-market territory, and it almost ended the current bull run in the S&P 500 and Dow Jones Industrial Average. Will 2020 succeed where 2018 failed?
This isn't the place for that kind of prediction. The point of this list is to make sure you're prepared for whatever the market sends your way.
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 holdings, they'll likely bounce back after any market downturn. But we're only human, and in market environments such as the panic in late 2018, you might feel pressured to cut bait entirely.
You could do that, but you'd end up absorbing trading fees and could give up attractive "yields on cost" – the actual dividend yield you receive from your initial cost basis. Alternatively, you could keep holding on to most of your investments, but wait it out with a simple hedge: the ProShares Short S&P500 (SH, $23.93).
ProShares' SH provides the inverse daily return of the S&P 500. In short, that means if the S&P 500 declines by 1% on Monday, the SH will gain 1% (minus expenses).
You certainly don't buy and hold this fund forever. You simply invest a small percentage of your portfolio in it when your market outlook is grim, and by doing so, you offset some of the losses that your long holdings incur during a down market. Naturally, the risk is that if you're holding SH when the market goes up, you'll cut into your own portfolio's gains. But as long as you understand and accept that risk, this ProShares fund can provide some peace of mind.