If you're an investor who favors the buy-and-hold strategy of letting carefully vetted investments accumulate meaningful returns over time, index-based exchange-traded funds (ETFs) may be the right vehicle for you. Even investment icon Warren Buffett knows it's difficult to beat index funds, which is why he famously mandated that 90% of the money he bequeaths his wife be invested in an S&P 500 fund. Of course, you don't have to be like Buffett and park all of your cash in index funds. But as long-term investments go, these vehicles are an attractive and typically low-cost choice.
What Is an ETF?
An ETF is a security that tracks stock indexes, commodities, bonds, or baskets of other assets. Unlike mutual funds, ETF shares trade like common stock on an exchange.
Simply stated: ETFs own underlying assets and divide ownership of those assets into shares, which investors may trade.
Top ETFs for Long-Term Investors
If you're a long-term investor planning your portfolio for 2019, here are some ETF best bets:
(All year-to-date (YTD) performance figures are based on fiscal year 2019. Funds were selected based on a combination of performance over time and assets under management (AUM). All figures were current as of Feb. 3, 2019.)
1. The Vanguard Total Stock Market ETF (VTI)
- Issuer: Vanguard
- Assets under management: $103.78 billion
- YTD performance: 8.70%
- Expense ratio: 0.04%
If you're uncertain which index to follow, or you wish to hedge your bets across a variety of sectors and market caps, this may be the fund for you. As the name implies, the Total Stock Market ETF covers the entire domestic stock market, tracking the CRSP U.S. Total Stock Market Index. VTI is a balanced fund, with a healthy mix of mid- and small-cap equities, as well as blue chip names.
VTI is a highly efficient fund with a low expense ratio. The fund hit a high of $144.00 on Dec. 3, 2018, then seesawed a bit, dipping to a low of $119.35. Investors will need to decide if current levels warrant entry, or if it's better to hold off until they see definitive signs of an upswing, before taking positions.
2. The SPDR S&P 500 ETF (SPY)
- Issuer: State Street Global Advisors
- Assets under management: $250.96 billion
- YTD performance: 8.06%
- Expense ratio: 0.09%
First to market, this granddaddy of ETFs tops the list in terms of AUM and trading volume, attracting tactical traders and buy-and-hold investors alike. The fund tracks the S&P 500, which is a group of equities from the U.S. large-cap space, that is carefully selected by a committee.
Technically, SPY is a unit investment trust (UIT), which means it cannot reinvest cash dividends between distributions. This minor detail may cause the fund's performance to deviate slightly from the index on which it's based, but even so, this fund boasts solid three-year and five-year performance figures at 47.92% and 67.35%.
3. The iShares Core MSCI EAFE ETF (IEFA)
- Issuer: iShares
- Assets under management: $55.23 billion
- YTD performance: 6.75%
- Expense ratio: 0.08%
IEFA delivers exposure to developed-market stocks in Europe, Australasia, and the Far East, excluding domestic and Canadian equities. Its benchmark index, the MSCI EAFE, covers some 98% of investible markets. Furthermore, it includes small cap stocks in proportion to the market—something competing funds don't do. Japan and the U.K. take the top two spots in the fund's portfolio, which is tilted toward financials and industrials.
Containing 2,759 equities, this well-diversified, highly liquid fund features tight spreads and low ownership costs, making it a prime choice for both long- and short-term investors who seek exposure to markets outside of North America. The fund is newer than the others mentioned in this article, with an inception date of October 18, 2012. Year-to-date, the price of the stock has fluctuated and is currently up 6.75%. Nonetheless, the three-year and five-year performance figures are on the positive side, at 24.94% and 16.88%, respectively.