Exchange-traded funds (ETFs) blend the diversification of a mutual fund with the liquidity of a stock. Unlike mutual funds, which have a set closing price each day, ETFs are actively traded like stocks.
ETFs also generally have lower and less complex fees than mutual funds. Like passive mutual funds and index funds, ETFs generally track certain sectors or indexes instead of following the whims of an active portfolio manager.
When selecting an ETF, investors should consider a few things. First, its net asset value (NAV), or its ratio of the value of fund liabilities to the value of its underlying assets, should be close to its market price. Its expense ratio, which equals an ETF's annual fees, shouldn't be much higher than the industry average of 0.44%.
Investors should also be familiar with the ETF's top holdings and its previous performance while being mindful that past growth never guarantees future gains.
Let's take a look at three top sector ETFs that pass those tests for 2020.
1. The Vanguard Consumer Staples ETF
Consumer staples stocks are often considered good defensive plays during market downturns. The Vanguard Consumer Staples ETF (VDC -0.17%) holds a basket of 93 stocks across that sector, and its top 10 holdings include evergreen brands like Procter & Gamble, Coca-Cola, PepsiCo, and Walmart.
Its top four product categories include household products, soft drinks, packaged foods and meats, and hypermarkets and supercenters. Over 99% of its holdings are based in the United States.
The ETF's total return more than tripled over the past decade, and it currently pays a dividend yield of 2.5%. It charges a low expense ratio of 0.1%, and its market price is only pennies above its NAV. These factors all make VDC a good ETF for investors who anticipate a flight to more defensive plays throughout 2020.
2. Global X MSCI China Large-Cap 50 ETF
Many Chinese stocks slid over the past two years as the U.S.-China trade war escalated and the Chinese economy grew at its slowest pace in nearly three decades. However, that outlook is gradually improving as the U.S. and China sign a "phase one" deal and the Chinese government launches fresh stimulus plans.
Investors who want exposure to that recovery without the concentrated risk of individual Chinese stocks should buy shares of the Global X MSCI China Large-Cap 50 ETF (CHIL). This ETF offers investors exposure to the 50 largest companies in China, and its top holdings include Tencent, Alibaba, China Construction Bank, and China Mobile.
The ETF was only launched in late 2018, but it generated a total return of 25% over the past 12 months, with an expense ratio of just 0.29% -- which is significantly lower than that of most other Chinese stock ETFs. It also trades in line with its NAV as of this writing.
3. SPDR Gold Shares
Gold prices recently hit a seven-year high after the escalation of military tensions between the U.S. and Iran. However, those prices could climb even higher throughout 2020 as additional uncertainties -- including the U.S. presidential election -- cause investors to flock to safe-haven assets like gold.
Investors who want to hedge their portfolios against those risks should consider buying shares of SPDR Gold Shares (GLD -1.03%). It's the largest gold-backed ETF in the world, and it's generated a total return of nearly 230% since its inception in Dec. 2007.
Its market price roughly matches its NAV, and it charges an acceptable expense ratio of 0.4%. Plenty of cheaper gold ETFs have entered the market in recent years, but the fund's size, its record of tracking gold's market price, and ownership of physical bullion still make it an ideal hedge against macroeconomic risks.