The stock market appears to be headed for solid returns in 2023. Next year will bring the U.S. presidential election. Historically, the market tends to perform well during presidential election years.
All in all, it seems to be a pretty good time to invest in exchange-traded funds (ETFs). With ETFs, you don't have to try and pick individual stocks that could be winners. Instead, you can scoop up many stocks in one fell swoop.
The main problem is that there are thousands of ETFs from which to choose. What's the best ETF to buy right now?
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Perennial favorites
It's pretty clear which ETF most investors think is the best pick right now. The SPDR S&P 500 ETF Trust (SPY 0.95%) has, by far, the most assets under management. It also typically ranks among the top ETFs with the most volume.
SPY isn't the only S&P 500 ETF that's a perennial favorite among investors. The iShares Core S&P 500 ETF (IVV 0.98%) and Vanguard S&P 500 ETF (VOO 1.00%) hold the No. 2 and No. 3 spots based on assets under management.
Warren Buffett explained the appeal of these ETFs in his 2013 letter to Berkshire Hathaway shareholders. The legendary investor wrote:
The goal of the non-professional investor should not be to pick winners -- neither he nor his "helpers" [professional investment managers] can do that -- but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.
Investing in any of these top S&P 500 ETFs should pay off over the long term because the S&P 500 is likely to rise over the long term. There's even an automatic mechanism in place to prune the poorly performing stocks.
Buffett wrote to Berkshire shareholders that he liked Vanguard's funds, almost certainly because of their low costs. However, IVV's annual expense ratio of 0.03% is a little lower than VOO's expense ratio of 0.04%. Both are well below SPY's expense ratio of 0.09%.
A big reason to think small
Buying and holding S&P 500 ETFs such as IVV, VOO, and SPY over the long term is a smart move. But there are even better ETFs to buy right now, in my view.
Ed Clissold, chief U.S. strategist with Ned Davis Research, believes that "small caps are trading at near their steepest discount on record." Janus Henderson small-cap portfolio manager Jonathan Coleman has argued that a reduction in interest rates could provide the catalyst needed for small-cap stocks to take off. The latest comments from the Federal Reserve hinted that interest rate cuts could be on the way in early 2024.
The Vanguard Small Cap Index Fund (VB 0.54%) provides a great way to invest in a basket of 1,430 small-cap stocks. If lower interest rates are indeed on the way, this ETF could soar higher than the large-cap S&P 500 ETFs. It also meets Buffett's low-cost criterion with an annual expense ratio of only 0.05%.
If small-cap stocks are cheap historically, small-cap value stocks are dirt cheap. For this reason, my personal pick as the best ETF to buy right now is the Vanguard Small-Cap Value ETF (VBR 0.37%). With VBR, you'll get a stake in 840 small-cap stocks with especially attractive valuations. Its annual expense ratio is a low 0.07%.
The best answer
While my favorite is VBR, the best answer to the question about what the best ETF to buy right now is that it depends on your investing goals. For example, if you're primarily seeking income, you might prefer to focus on high-yield dividend ETFs or perhaps bond ETFs.
That said, I think that any investor with a long-term mindset won't go wrong buying one of the aforementioned S&P 500 ETFs or the two Vanguard small-cap ETFs. My prediction is that all of these funds will deliver solid returns over time.
