Whether you're shifting your portfolio to better suit your retirement years or are just getting into the market, exchange-traded funds could be a good fit for your investment needs. ETFs typically track an index and group a range of stocks together, which reduces your risk profile by spreading your holdings around, and they also tend to have low expense costs and tax benefits compared to managed mutual funds.
To give readers a look at some ETFs that stand out as particularly compelling investment vehicles, we asked a panel of Motley Fool investors to spotlight some top candidates in the space. Read on to learn why they think Vanguard Dividend Appreciation ETF (VIG -0.83%), WisdomTree U.S. Quality Dividend Growth (DGRW -0.74%), and Vanguard Information Technology ETF (VGT -1.06%) are great ways to ride in the market.
Let this investment pay off for you
Dan Caplinger (Vanguard Dividend Appreciation): No matter how old you are, you can benefit from investing in the stock market. All it takes is tailoring your particular market exposure to your financial needs and your risk tolerance. The Vanguard Dividend Appreciation ETF focuses on the most stable dividend stocks in the market, favoring those that have established long histories of consistent increases in their payouts to investors. The stocks that Vanguard Dividend Appreciation owns have demonstrated an ability to overcome short-term adversity from business challenges and the ups and downs of the economy, and to reward their shareholders for their loyalty.
Vanguard Dividend Appreciation doesn't mindlessly choose dividend stocks because of their yield, but it does provide a respectable amount of regular income to its shareholders. With a current yield of 2.1%, the ETF doesn't top the list of dividend ETFs. Yet over time, investors will find that their quarterly payments grow, and that's exactly what risk-averse retirees trying to live off their income will appreciate the most.
Dividend ETFs have a good combination of safety and growth potential, but they aren't all alike. If you want predictability and stability, then Vanguard Dividend Appreciation is a good place to start as a way to stay in the investing game.
Size matters, as does growth
Rich Duprey (WisdomTree U.S. Quality Dividend Growth Fund): Investing in an ETF provides low costs and tax efficiency, and a fund like WisdomTree U.S. Quality Dividend Growth could be an appropriate vehicle for people looking to also minimize risk.
WisdomTree U.S. Quality Dividend Growth Fund seeks to track the investment results of dividend-paying large-cap companies that also possess growth characteristics. Starting with the WisdomTree Dividend Index -- a custom index created by WisdomTree -- the ETF screens for stocks with at least a $2 billion market cap (though most are over $10 billion), then qualifies them by selecting those with the best long-term earnings growth potential, while evaluating their returns on both equity and assets.
In short, the WisdomTree U.S. Quality Dividend Growth Fund is looking at growing large-cap companies, paying a healthy dividend, that will likely continue growing and expanding in the future. Chasing yield can lead to disaster for income investors; going after dividend growers can lead to outperformance. Currently, the top five weighted stocks in the fund are Johnson & Johnson, Apple (AAPL 2.44%), Microsoft (MSFT -2.36%), Altria Group, and AbbVie, with the rest of the fund's top holdings familiar names that help minimize volatility.
The ETF has a low net expense ratio of 0.28%, though it's not the cheapest one out there, but it continues to perform well in the sort of market we've been experiencing, and it has earned a five-star rating from Morningstar. With a yield of 1.6%, this ought to provide investors with a portfolio of quality names that are growing dividends, and are also looking for a yield component while keeping risk in check.
Keep up with technology
Keith Noonan (Vanguard Technology ETF): If you're looking for growth in an ETF, selecting a fund with heavy exposure to the technology sector is probably a smart move. The Vanguard Information Technology ETF stands out as a top tech fund.
As evidence of the tech sector's outsize growth power, Vanguard Information Technology has gained roughly 122% over the last five years while the S&P 500 has gained roughly 85%. That difference in performance is even more notable because the information technology sector is actually the largest component of the S&P 500, and accounted for the greatest share of the go-to index's growth over the stretch. So, while a fund that tracks the S&P 500 would give you tech exposure as well, Vanguard Information Technology could be the way to go for investors who are willing to take on some extra risk in pursuit of market-beating growth.
The fund offers broad exposure to different industries in the sector without the research time or trading fees associated with building a portfolio based on individual stock picks. Vanguard Information Technology currently holds 364 stocks across tech industries including data processing, internet software and services, and hardware -- though it also includes companies that specialize in payment services. Its top five holdings by weight are Apple, Alphabet, Facebook, Microsoft, and Visa.
Vanguard Information Technology has an expense ratio of 0.1%, which is 93% lower than the average fund with similar holdings, according to Vanguard. It also packs a 1% dividend yield after expenses are accounted for -- not a lot compared to the S&P 500's 1.9% yield, but still a welcome part of owning the fund.