It is not an easy task to find the best exchange-traded funds (ETFs) that have the adaptability and performance history to fit into almost any investment portfolio. However, we did the research and sorted through dozens of funds to come up with the top 10 ETFs that represent a variety of categories. These ETFs are the best in their respective categories. These funds are suitable for use in the construction of diversified investment portfolios by virtually any type of investor.
Before we go into the list of funds, let's go through the fundamentals of exchange-traded funds (ETFs) to be sure that this sort of investment will meet your requirements as an investor.
Exchange-traded funds are similar to mutual funds, but the primary distinction is that exchange-traded funds are exchanged on an exchange both during the trading day and after the market has closed for the day.
There is a large selection of exchange-traded funds available, each with its own unique objectives; nonetheless, the majority of these funds track an index.
Your trading objectives, skills, available time, and trading methods will all play a role in determining which ETF is the most suitable for you.
What Exactly Is an ETF?
Even if you've never put money into exchange-traded funds (ETFs), there's a high chance that you're familiar with this flexible type of investing instrument. But exactly what are exchange-traded funds?
"exchange-traded fund" is what "ETF" refers to when it's abbreviated as such. They operate in a manner that is analogous to that of mutual funds in that they are individual securities that hold a collection of underlying investments. The great majority of exchange-traded funds (ETFs), comparable to index funds, passively follow a benchmark index like the S&P 500 index, the NASDAQ 100 index, or the Russell 2000 index. However, this is where the similarities between ETFs and mutual funds come to an end.
How Do ETFs Differ From Mutual Funds?
ETFs, on the other hand, engage in trading throughout the day, in contrast to mutual funds, which only trade at the end of the day. This gives you more flexibility in choosing an entrance point, giving you the opportunity to potentially take advantage of short-term price swings. However, exchange-traded funds (ETFs) might be useful options for those looking to make long-term investments. This is also another trait that they share with their index mutual fund relatives.
ETFs, on the other hand, have a tendency to have lower expenses than mutual funds because of their simplicity and their passive nature. Additionally, ETFs are particularly tax-efficient due to the fact that there is very little turnover of the portfolio of underlying securities. Because of this, they are excellent investments for taxable brokerage accounts.
You are now tasked with selecting the most advantageous exchange-traded funds (ETFs) for inclusion in your portfolio. As is the case with the benefits of diversification offered by mutual funds and various other types of investments, it is prudent to hold more than one ETF for the majority of your goals.
The 10 Most Successful Exchange-Traded Funds That Track Major Market Indices
We'll begin our selection of the 10 best exchange-traded funds to hold with widely traded funds that track broadly diversified indexes. These funds are suitable for any investment objective or strategy. These exchange-traded funds each track a different index that is composed of equities from a variety of industries.
1. SPDR S&P 500 (SPY)
SPY was the first exchange-traded fund (ETF) ever made available to investors when it began trading in 1993. SPY is an exchange-traded fund that follows the S&P 500 index in an unactive manner, as its name suggests. It includes over 500 of the most valuable equities that are traded in the United States according to market capitalization. The company provides its shareholders with a broad portfolio of companies such as Alphabet (GOOGL), Apple (AAPL), and Microsoft (MSFT) (GOOG). For investors looking to achieve their long-term investment goals, purchasing SPY on its own can be an effective strategy. Alternatively, one might use it as a central investment in a portfolio that is more diversified. The potential investors in SPY should be informed that despite the fact that the index fund holds hundreds of stocks, it is normal for its value to decrease temporarily. The expense ratio of SPY is extremely low, coming in at only 0.0945 percent, which translates to $9.45 per year for every $10,000 invested. Because of this, SPY is less expensive than the majority of index funds that track the S&P 500.
2) The iShares Russell 3000 Index Fund (IWV)
IWV is an excellent option for shareholders who are searching for greater diversification than what is provided by the S&P 500 index. This exchange-traded fund follows the performance of the Russell 3000 index, which is comprised of about 3,000 equities from the United States. Large-cap stocks make up the majority of this list. However, in addition to owning S&P 500 index funds, IWV also invests in small and mid-cap equities, which results in a more diversified holding than S&P 500 index funds. Investors who are just getting their feet wet in the world of exchange-traded funds might want to consider IWV as an option. Due to the fact that IWV only invests in stock, prospective investors ought to have a high relative risk tolerance and a long-term time horizon for their investments. IWV has a cost ratio of 0.20 percent, which translates to $20 in annual fees for every $10,000 that is invested.
3.iShares Russell 2000 Index Fund (IWM)
This exchange-traded fund (ETF) may be a good option for aggressive investors who seek extensive exposure to small-cap firms. IWM follows the performance of the Russell 2000 index, which is comprised of around 2,000 stocks with a low market capitalization in the United States. Although small-cap stocks are subject to a greater degree of market risk than large-cap stocks, the latter does not have the potential for the same level of long-term growth. IWM is an excellent choice for a portfolio to use as a satellite fund. Through diversification, it has the ability to boost earning potential while simultaneously lowering risk. IWM charges expenses at a rate of 0.19 percent annually, which comes to $19 for every $10,000 invested.
4. Vanguard S&P 400 Mid-Cap 400 (IVOO)
The mutual funds offered by Vanguard are noted for their high level of quality, low cost, and absence of load fees. However, it also has a varied range of ETFs, and IVOO is possibly the greatest mid-cap ETF that is currently available on the market. It is common to practice to refer to mid-cap companies as the "sweet spot" of the market. This is due to the fact that, historically speaking, mid-cap equities have historically averaged higher long-term returns than large-cap stocks. In the same vein, the market risk associated with these equities is far smaller than that of small-cap stocks. Due to the fact that an investment possesses both of these characteristics, IVOO is an excellent option to employ either as an aggressive core holding or as a complement to an S&P 500 index fund. IVOO has a cost ratio of 0.10 percent, which translates to $10 in annual fees for every $10,000 that is invested.
5. The iShares MSCI EAFE Index Fund (EFA)
If you could only invest in one exchange-traded fund (ETF) that tracks international stocks, EFA would be the one to pick. This exchange-traded fund follows the performance of the MSCI EAFE index, which is comprised of approximately 900 equities from the developed world regions of Europe, "Australasia" (which includes Australia and New Zealand), and the Far East and is represented by the name EAFE. The interests consist of both large- and mid-capitalization companies. Because investing in foreign markets is typically associated with a higher level of market risk than investing in U.S. markets, EFAs are best utilized as a satellite holding within a diversified investment portfolio. The expenditure ratio for EFA is 0.32 percent, which translates to $32 a year for every $10,000 that is invested.
6. iShares Core Aggregate Bond Exchange Traded Fund (AGG)
An investor can have exposure to the entirety of the U.S. bond market with only a single ETF. Because of its extensive diversity, AGG is an excellent choice as either a standalone bond fund or as a core holding for the fixed income section of a portfolio. You can receive exposure to more than 8,000 bonds for an expense ratio of just 0.04% of the total value of the fund.
The Top ETFs Representing Each Sector
Although sector funds aren't right for everyone, they can be useful additions to any portfolio when it comes to diversification if you choose wisely. Additionally, there is the possibility that they will boost long-term returns. In this section of our guide to the finest exchange-traded funds (ETFs), we will focus on sector funds for the last four funds.
7. Healthcare SPDR (Symbol: XLV) (XLV)
This exchange-traded fund is dedicated to the healthcare industry. It is well-known for the multiple benefits it offers, including the potential for long-term development as well as protective qualities. Companies in the pharmaceutical and biotechnology industries are included in the health industry. In addition to that, it encompasses companies that make medical equipment as well as hospital businesses and other entities. The combination of an aging population and progress made in medical technology positions the healthcare industry to be one of the most successful in the foreseeable future. The reason why stocks in the healthcare industry are called defensive is that they have a tendency to maintain their value better than the overall market does, even during times of significant market drop. Even amid economic downturns, patients must continue to seek medical care and take their prescribed medications. XLV has a cost ratio of 0.13 percent, which translates to $13 in annual fees for every $10,000 invested.
8.Energy Select Sector SPDR ranks eighth (XLE)
A well-diversified portfolio of exchange-traded funds (ETFs) may also benefit from including exposure to the energy sector. Companies in the energy sector include those that generate oil and natural gas. Because oil is a finite resource, there is a good chance that prices for other forms of energy, including energy stocks, will continue to go up. XLE has an expense ratio of 0.13%, which translates to $13 in annual fees for every $10,000 that is invested.
9. Utilities Select Sector SPDR (XLM)
Utilities are corporations that provide services to consumers such as gas, power, and water. Utilities are included in the Utilities Select Sector SPDR (XLM). Similar to healthcare-related businesses, utility companies are still required even in difficult economic times. Because of this, investing in these companies can be considered a defensive move, and they are also useful tools for practically any long-term portfolio. XLU has a cost ratio of 0.13%, which translates to $13 in annual fees for every $10,000 that is invested.
10.Consumer Staples Select Sector SPDR comes in at number ten (XLP)
The consumer staples sector is a solid method to accomplish the goal of broader diversification of defensive stocks, and investing in that sector is a smart approach to achieve that purpose. Items that are essential to a person's way of life are known as consumer staples. Among these are pharmaceuticals, foodstuffs, alcoholic beverages, and tobacco products. XLU has a cost ratio of 0.13%, which translates to $13 in annual fees for every $10,000 that is invested.
Questions That Are Typically Asked (FAQs)
How do exchange-traded funds (ETFs) do as long-term investments?
Although exchange-traded funds (ETFs) have the potential to be excellent, tax-efficient investments for the long term, not every ETF is suitable for such an investment. For instance, inverse and leveraged exchange-traded funds are only intended to be held for brief periods of time. In general, an exchange-traded fund (ETF) is going to be a more attractive option for a long-term investment if it is both passive and diversified. Working with a financial advisor can assist you in identifying the exchange-traded funds (ETFs) that are most suitable for your own circumstances.
When is the most profitable time of the day to trade exchange-traded funds (ETFs)?
When volume and liquidity are at their peak levels, the optimum time for traders who want to aggressively enter and leave ETF positions is to trade at those times. On a daily basis, this takes place about during the first and final hours of trade. It is important to keep in mind that unexpected volume spikes might be caused by economic events such as announcements made by the Federal Reserve. You can keep track of occurrences of this nature with the assistance of an economic calendar.