The year 2019 was the second-best on record for exchange traded fund (ETF) inflows—$326 billion. And even as stocks plunged and high volatility marked the first half of 2020, over $200 billion still flowed into ETFs in the first half of the year. Investors now face a dizzying array of choices when it comes to identifying the best exchange traded funds (ETFs) for their portfolio.
Of course, what defines a “best ETF” is not static. Some investment ideas that work for 25-year-old investors are probably not appropriate for retirees. That is to say, what defines the best ETF for various investors depends on individual levels of risk tolerance and investment goals. The best ETFs are not necessarily those with the highest yield but are those that offer the greatest risk/reward in their respective category. This factors in variables such as liquidity, macro-stability, distributions, and overall investor sentiment.
- Even as stocks plunged and high volatility marked the first half of 2020, over $200 billion still flowed into exchange traded funds (ETFs) in the first half of the year.
- Investors face a dizzying array of choices when it comes to identifying the best exchange traded funds (ETFs) for their portfolio.
- While the ETF landscape is large and growing by the day, some funds can be considered the best—by a majority of investors—in their respective categories.
While the ETF landscape is large and growing by the day, some funds can be considered the best—by a majority of investors—in their respective categories. Here is a comprehensive list of ETFs that are among the best funds across a wide array of asset classes.
Best Technology ETF
Technology is the largest sector weight in the S&P 500 and, as such, it is often one of the largest sector exposures in a wide variety of broad market funds. Some technology funds are also among the most popular sector funds. Throughout 2020, the technology sector has performed better than the broader economy. There are 56 technology ETFs.
The ARK Next Generation Internet ETF is an actively-managed fund, which means it does not track a particular index. The goal of ARKW is to identify companies that will make gains from innovations in cloud computing, artificial intelligence (AI), financial technology, and similar innovations. Its largest holdings are Tesla Inc. (TSLA), the electric car company; Square Inc. (SQ), the mobile payments company; and Roku Inc. (ROKU), the digital streaming equipment maker.
As of November 2020, ARKW has a one-year trailing total return of 127.57%, an expense ratio of 0.76%, a three-month average daily volume of 735,924, and assets under management of $2.8 billion.
Best Commodity ETFs
Commodities used to be difficult to enter, but have become one of the most heavily traded asset classes made more accessible by ETFs. Some commodities ETFs, including gold funds, are so large that the ETF market now plays an important role in price discovery.
Gold and Silver ETFs
Among ETFs backed by physical holdings of gold, of which dozens are listed worldwide, the premier choice for professional traders is the Invesco DB Precious Metals Fund (DBP).
Oil ETPs are different animals than their precious metals counterparts. Due to the use of futures contracts, many oil ETPs make for poor long-term investments because they can expose investors to contango by using front-month futures. The United States 12 Month Oil Fund (USL) takes a different approach.
“USL's Benchmark is the near-month futures contract to expire and the contracts for the following 11 months, for a total of 12 consecutive months. If the near-month futures contract is within two weeks of expiration, the Benchmark will be the next month contract to expire and the contracts for the following 11 consecutive months,” according to the issuer, USCF Investments. Investors who desire increased liquidity might consider (USO) as an alternative.
Best ETFs to Buy and Hold
Determining the best exchange traded funds for buy-and-hold is subjective and a matter of personal preference, but some funds are considered cornerstones of many portfolios. For investors looking for a buy-and-hold option for domestic large-caps, a good place to start is focusing on funds with low volatility, such as the iShares Edge MSCI Min Vol USA ETF (USMV).
Low volatility ETFs, one of the dominant types in the smart beta segment, is designed to perform less poorly than traditional funds during bear markets, not capture all of the upsides in a bull market. That said, low volatility stocks outperform higher volatility peers over long holding periods and USMV has trailed the S&P 500 only slightly, though remaining less volatile.
Speaking of volatility, mid-caps are usually less volatile than small-caps over the long haul while producing better returns than large-caps without significantly more volatility. For long-term investors, an even better way to access mid-caps is with dividends via the WisdomTree U.S. MidCap Dividend Fund (DON). DON tracks a dividend-weighted index and has offered impressive long-term out-performance of the S&P MidCap400 Index.
DON has been one of the best performing mid-cap funds, active or passive since its inception more than a decade ago.
Small-caps are also winners over the long term, but smaller stocks are historically more volatile than their large- and mid-cap peers. Investors can ameliorate that situation by embracing a potent factor combination: small size and value. Small-cap value stocks have historically delivered stellar long-term returns while being less volatile than smaller stocks without the value designation.
The iShares S&P Small-Cap 600 Value ETF (IJS) has a three-year standard deviation of 25.20%, which is well below the comparable metric on benchmark small-cap growth indexes. Small-cap value index sector exposure often include financial services, industrials, and perhaps some consumer cyclical weight.
Best International ETF
Stock picking is a tricky endeavor, which is why many active managers fail to beat their benchmarks and why many investors have gravitated to passively managed ETFs. Picking stocks in markets outside the U.S. is even more difficult.
An ideal for many investors to tap foreign markets is via a broad-based approach that combines developed and emerging markets. The iShares Core MSCI Total International Stock ETF (IXUS) does that, though it tilts more toward developed markets. IXUS delivers exposure to over 4,400 stocks at a modest annual fee of 0.09%.
“The fund's market-capitalization-weighting approach skews the portfolio toward large multinational firms,” said the independent investment research firm Morningstar. “These companies tend to be more profitable and less volatile than their smaller counterparts.”
With a low standard deviation, IXUS is also suitable for conservative investors looking to carve out international exposure in their portfolios.
Best Dividend ETF
Dividend investors have plenty of exchange funds to choose from, but many of the oldest funds in this category ascribe to one of two approaches: weighting stocks by yield or measuring components by the length of dividend increase streaks.
While a company's dividend track record can be instructive, it is not the only way to forecast payout growth. After all, what a company did last year (or five years ago) does not mean it will be repeated this year. The WisdomTree U.S. Quality Dividend Growth Fund's methodology (DGRW) makes it a compelling play for any income investor.
DGRW tracks the WisdomTree U.S. Quality Dividend Growth Index, which employs quality and growth factors.
“The growth factor ranking is based on long-term earnings growth expectations, while the quality factor ranking is based on three-year historical averages for return on equity and return on assets,” according to WisdomTree, the issuer. Plus, DGRW pays a monthly dividend.
Best Vanguard ETF 2020
Vanguard is the second-largest U.S. ETF sponsor, trailing only iShares. Compared to rivals such as iShares and State Street's SPDR brand, Vanguard's total ETF stable is relatively small (in November 2020, Vanguard had 81 ETFs), but still large enough to make pinning down the best Vanguard ETF a difficult task.
One Vanguard ETF that stands out in 2020 is the Vanguard FTSE Developed Markets ETF (VEA). VEA provides exposure to 3,998 equity holdings from over 25 countries as of November 2020. The ETF charges just 0.05% per year, making it cheaper than the 0.98% average expense ratio of similar funds.
Best Fidelity ETF
Fidelity Investments, known primarily for its active mutual funds and massive footprint in the 401(k) market, was a late entrant to the ETF arena, but the Boston-based company has made its presence felt with the lowest cost sector ETFs on the market as well as some smart beta products. The company's 11 sector ETFs each carry annual fees of 0.084%, making them the cheapest ETFs in the industry.
One of the company's best ETF offerings may be the Fidelity Quality Factor ETF (FQAL), which debuted in the third quarter of 2016. The quality factor is often durable over the long-term and its hallmarks include dividend-paying companies, firms with sound balance sheets and/or impressive cash flow generation, and wide-moat companies, among other traits.
FQAL tracks the Fidelity U.S. Quality Factor Index, which is home to around 129 stocks, suggesting the quality designation is not easy to attain. The ETF charges 0.29% per year, which is fair among smart beta strategies, and is commission-free through your Fidelity brokerage account.
Best Energy ETF
Seasoned energy sector investors know this sector is very much a risk/reward proposition. In the ETF space, equal-weight and other smart beta strategies can be efficacious at the sector level, but with energy, it may be best to stick with prosaic methodologies.
The Fidelity MSCI Energy Index ETF (FENY) is suitable for an array of investors. Like every other cap-weighted energy ETF on the market, FENY is heavily allocated to Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX), the two largest U.S. oil companies. However, FENY holds 91 stocks, indicating it has some exposure to potentially promising smaller energy stocks and a bigger roster than the S&P 500 Energy Index.
FENY has an annual fee of just 0.08%, making it the least expensive energy ETF on the market. Like FQAL, FENY is available to Fidelity clients without a commission.
Best Financial ETF
There are around 30 U.S.-listed ETFs dedicated to the financial services sector, plenty of which qualify as solid options. Size alone is not a determinant of an ETF's value or alpha-delivering potential, but in the case of the Financial Select Sector SPDR (XLF), size does not hurt. As the largest ETF tracking this sector—with over $18.23 billion AUM as of November 5, 2020, XLF has attractive low bid/ask spreads, a factor to consider for active traders. XLF charges an expense ratio of 0.13%.
Home to over 65 stocks, XLF features companies in the diversified financial services; insurance; banks; capital markets; mortgage real estate investment trusts (REITs); consumer finance; and thrifts and mortgage finance industries. The largest financial companies in the U.S. are usually money center or investment banks and as such, those two industries represent nearly two-thirds of XLF's weight.
The weighted average market value of XLF's components is more than $155 billion.
Best Bank ETF
There are important differences between diversified financial services ETFs, such as XLF, and bank ETFs. The former group purports to be diversified, while bank ETFs try to be dedicated to bank stocks without including capital markets firms or insurance providers.
The First Trust Nasdaq Bank ETF (FTXO), which debuted in the third quarter of 2016, is new relative to other banks ETFs, but the fund employs an interesting methodology. FTXO tracks the Nasdaq U.S. Smart Banks Index, which employs growth, value, and volatility factors in its weighting scheme. Components are weighted based on their scores across those factors.
Due to the stringent natures of FTXO's smart beta weighting methodology, its lineup is small compared to well-known bank benchmarks. The First Trust ETF holds 28 stocks compared to 88 in the S&P Banks Select Industry Index.
While FTXO is a departure from traditional financial services and bank ETFs, it probably should not be paired with funds such as XLF due to large overlap among major money center bank stocks including Bank of America Corp. (BAC).