Finding the best ETFs with the versatility and track record to fit into almost any investment portfolio is not a simple task, but we did the homework and sifted through dozens of funds to arrive at the 10 best ETFs that represent diverse categories. Almost any investor can use these funds to build a diversified portfolio.
Before we get into the list of funds, let's review the basics of ETFs to be sure that this investment type is appropriate for your investing needs.
- Exchange-traded funds are similar to mutual funds but are traded on an exchange throughout a trading day and after the market closes.
- There are many exchange-traded funds with different goals to choose from, but many track an index.
- Finding the best ETF for you depends on your trading goals, abilities, time, and strategies.
What Is an ETF?
Even if you've never invested in ETFs, chances are good that you've heard of this versatile investment vehicle. But what exactly are ETFs?
ETF is an acronym that stands for "exchange-traded fund." They're similar to mutual funds in that they are single securities that hold a basket of underlying securities. Like index funds, the vast majority of ETFs passively track a benchmark index. These could include the S&P 500 index, the NASDAQ 100, or the Russell 2000, but that's where the similarities of ETFs and mutual funds end.
How Do ETFs Differ From Mutual Funds?
Unlike mutual funds, which trade at the end of the day, ETFs trade during the day. That provides greater versatility in choosing an entry point, potentially taking advantage of short-term fluctuations in price. But ETFs can be smart investment choices for long-term investors. That is another similarity to their index mutual fund cousins.
ETFs tend to have lower expenses than mutual funds, due to their simplicity and passive nature, and because there is very little turnover of the portfolio of underlying securities, ETFs are very tax-efficient. That makes them smart holdings for taxable brokerage accounts.
Now, you're only left with the task of choosing the best ETFs to hold in your portfolio. As with the strength of diversification with mutual funds and other investment types, it is wise to hold more than one ETF for most objectives.
The 10 Best ETFs That Track Major Market Indexes
To start off our list of 10 best ETFs to hold for any investing goal or style, we'll start with widely traded funds that track broadly diversified indexes. These ETFs each track an index that holds stocks across several sectors.
1. SPDR S&P 500 (SPY)
Opening to investors in 1993, SPY was the first ETF available on the market. As its name suggests, SPY passively tracks the S&P 500 index. It represents over 500 of the largest stocks in the U.S., as measured by market capitalization. Shareholders get a diversified portfolio of stocks like Apple (AAPL), Microsoft (MSFT), and Alphabet (GOOG). SPY can work well as a standalone investment for long-term investment objectives. or it can be a core holding in a more diversified portfolio. Potential investors should be aware that, although SPY holds hundreds of stocks, short-term declines in 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 who want broader diversification than the S&P 500 offers will want to take a close look at IWV. This ETF tracks the Russell 3000 index, which represents approximately 3,000 U.S. stocks. Most of these are large-cap stocks. But IWV also holds small- and mid-cap stocks, which makes for a more diversified holding than S&P 500 index funds. IWV can be a smart choice for investors getting started investing with ETFs. The fact that IWV holds 100% stocks means that investors should have long-term time horizons and high relative 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 choice for aggressive investors wanting broad exposure to small-cap stocks. IWM tracks the Russell 2000 index, which represents about 2,000 U.S. stocks of small-capitalization. Small-cap stocks have more market risk than large-cap stocks; they also have the potential for higher long-term returns. IWM can make a good satellite fund in a portfolio. It can increase earning potential while reducing risk through diversification. Expenses for IWM are 0.19% or $19 each year for every $10,000 invested.
4. Vanguard S&P 400 Mid-Cap 400 (IVOO)
Vanguard is best known for its high-quality, low-cost, no-load mutual funds. But it also have a diverse selection of ETFs; IVOO may be the best mid-cap ETF on the market. Mid-cap stocks are often called the "sweet spot" of the market, because they have historically averaged 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 an investment makes IVOO a smart choice to use as an aggressive core holding or as a complement 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 had to choose just one foreign stock ETF to buy, EFA would be a smart choice. This ETF tracks the MSCI EAFE index, which represents over 900 stocks in the developed world regions of Europe, “Australasia” (Australia and New Zealand), and the Far East, which makes up the EAFA acronym. The stocks include large- and mid-cap holdings. Foreign investing tends to carry higher market risk than U.S. investing, which means that EFA is best used as a satellite holding 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)
In just one ETF, an investor can capture the entire U.S. bond market. This broad diversification makes AGG a solid core holding for the fixed income portion of a portfolio or as a standalone bond fund. For just a 0.04% expense ratio, you can gain exposure to more than 8,000 bonds.
Best ETFs for Sectors
Sector funds are not for everyone, but they can be smart additions to any portfolio for the purpose of diversification. They also have the potential to increase long-term returns. For the final four funds in our list of best ETFs, we'll highlight sector funds.
7. Healthcare SPDR (XLV)
This ETF focuses on the health sector. It's known for its combined benefits of long-term growth potential and defensive qualities. The health sector includes pharmaceutical companies and biotechnology firms. It also includes medical device manufacturers, hospital corporations, and more. With an aging population and advances in medicine, the health sector is poised to be a top-performing sector for the foreseeable future. The reason health stocks are considered to be defensive is that they tend to hold their value better than the broad market during major declines. People still need their medication and to visit the doctor during recessions. The expense ratio for XLV is 0.13% or $13 annually for every $10,000 invested.
8. Energy Select Sector SPDR (XLE)
The energy sector can also be a quality addition to a diversified portfolio of ETFs. Energy includes companies that produce oil and natural gas. Since oil is a limited resource, energy prices are likely to trend higher, as will the prices for energy stocks. The expense ratio for XLE is 0.13% or $13 annually for every $10,000 invested.
9. Utilities Select Sector SPDR (XLM)
Utilities include companies that provide utility services, such as gas, electric, and water to consumers. Like healthcare-related companies, utilities are still needed during market downturns. That makes these stocks good defensive plays and smart tools for almost any long-term portfolio. The expense ratio for XLU is 0.13% or $13 annually for every $10,000 invested.
10. Consumer Staples Select Sector SPDR (XLP)
If you want broader diversification of defensive stocks, the consumer staples sector is a good way to capture that objective. Consumer staples are items that consumers buy for daily living. Some of these include healthcare items, food, alcohol, and tobacco. The expense ratio for XLU is 0.13% or $13 per year for every $10,000 invested.
Frequently Asked Questions (FAQs)
Are ETFs good for long-term investing?
ETFs can make great, tax-efficient, long-term investments, but not every ETF is a good long-term investment. For example, inverse and leveraged ETFs are designed to be held only for short periods. In general, the more passive and diversified an ETF is, the better candidate it'll make for a long-term investment. A financial advisor can help you target ETFs that are best for your financial situation.
What is the best time of the day to trade ETFs?
For traders looking to actively enter and exit ETF positions, it's best to trade when volume and liquidity are at their highest levels. On most days, this occurs roughly in the first and last hours of trading. Keep in mind that economic events like Federal Reserve announcements can cause unusual volume spikes. An economic calendar can help you track these types of events.
The Balance does not provide tax, investment, or financial services or advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.