In this article, we will review the top 10 Exchange-Traded Funds (ETFs) that can be used to build a diversified investment portfolio. We will start by explaining what ETFs are and how they differ from mutual funds. Then, we will explore the top 10 ETFs that track major market indices and the best ETFs for different sectors. Finally, we will answer some frequently asked questions about ETFs.
What are ETFs?
ETFs are investment funds that trade on the stock exchange throughout the trading day and after the market closes. ETFs are similar to mutual funds in that they contain a collection of underlying securities. Like index funds, most ETFs track a specific index such as the S&P 500, the NASDAQ 100, or the Russell 2000. However, ETFs differ from mutual funds in some key ways.
How do ETFs differ from mutual funds?
Unlike mutual funds that trade at the end of the day, ETFs trade throughout the day. This provides greater flexibility in choosing an entry point, allowing one to take advantage of short-term price fluctuations. However, ETFs can also be a smart choice for long-term investors. This is similar to mutual index funds.
ETFs tend to have lower expenses than mutual funds due to their simplicity and passive nature. Because there is no significant turnover in the underlying securities portfolio, ETFs are highly tax-efficient. This makes them a smart investment for taxable broker accounts.
Top 10 ETFs that track major market indices
Let’s begin our list of the top 10 ETFs that can be held for any investment goal or style with funds that track various and diversified indices. Each of these funds tracks an index containing stocks from multiple sectors.
1. SPDR S&P 500 (SPY)
SPY was opened for investors in 1993 and was the first ETF available on the market. As its name suggests, SPY tracks the S&P 500 index. It represents over 500 of the largest stocks in the United States by market capitalization. Shareholders receive a diversified portfolio of stocks like Apple, Microsoft, and Alphabet. SPY can serve well as a standalone investment for long-term investment goals or it can be a core holding in a more diversified portfolio. Potential investors should be aware that although SPY contains hundreds of stocks, a short-term decline in its value should be expected. The expense ratio for SPY is just 0.0945% or $9.45 annually for every $10,000 invested. This makes SPY cheaper than most S&P 500 index funds.
2. iShares Russell 3000 (IWV)
Investors looking for greater diversification than what the S&P 500 offers will want to consider IWV closely. This fund tracks the Russell 3000 index, which represents approximately 3,000 stocks in the United States. Most of these stocks are large-cap stocks. However, IWV also includes small- and mid-cap stocks, making it more diversified than S&P 500 index funds. IWV can be a smart choice for investors starting to invest in ETFs. The fact that IWV contains 100% equities means investors should have long-term time horizons and a relatively high risk tolerance. The expense ratio for IWV is 0.20% or $20 annually for every $10,000 invested.
3. iShares Russell 2000 (IWM)
This ETF can be a smart option for aggressive investors looking for broad exposure to small-cap stocks. IWM tracks the Russell 2000 index, which consists of approximately 2,000 stocks in the United States from small-cap companies. Small-cap stocks carry greater market risks than large-cap stocks; they also have the potential for higher long-term returns. IWM can be a good satellite fund in a portfolio. It can increase earning potential while reducing risk through diversification. The expense ratio for IWM is 0.19% or $19 annually for every $10,000 invested.
4.
Vanguard S&P 400 Mid-Cap 400 (IVOO)
Vanguard is renowned for its high-quality, low-cost, load-free mutual funds. However, it also offers a variety of ETF funds; and IVOO may be the best mid-cap stock ETF in the market. Mid-cap stocks are often considered the “sweet spot” in the market as they typically achieve higher long-term returns than large-cap stocks. At the same time, they carry lower market risk than small-cap stocks. This dual quality in investing makes IVOO a smart choice to use as an aggressive core investment or as a supplement to an S&P 500 index fund. The expense ratio for IVOO is 0.10%, or $10 annually for every $10,000 invested.
5. iShares MSCI EAFE (EFA)
If you could choose only one fund to invest in foreign stocks, EFA would be a smart choice. This fund tracks the MSCI EAFE index, which represents over 900 stocks in developed regions of the world including Europe and “Australia” (Australia and New Zealand) and the Far East, forming the acronym EAFA. The stocks include large-cap and mid-cap stocks. Foreign investment tends to carry higher market risk than investment in the U.S., meaning EFA should be used as a sub-investment in a diversified portfolio. The expense ratio for EFA is 0.32% or $32 annually for every $10,000 invested.
6. iShares Core Aggregate Bond (AGG)
Investors can gain a diversified portfolio of the U.S. bond market simply by purchasing this exchange-traded fund. This wide diversification makes AGG a strong core investment for the fixed income portion of a portfolio or as a separate bond fund. For an expense ratio of just 0.04%, you can gain exposure to a diversified bond market.
Source: https://www.thebalancemoney.com/best-etfs-for-your-investing-goals-4135797
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