History has pretty conclusively shown that Wall Street's major indexes increase in value over very long timelines. This is a reflection of the U.S. and global economy growing over time, as well as the major indexes adding outperforming businesses and removing those that struggle.
However, directional stock movements are anything but predictable when looked at over the course of a few months. Everything from short-term news events to investor sentiment can swing the stock market higher or lower at a moment's notice.
For some investors, volatility isn't a big deal. But for others, it's precisely why exchange-traded funds (ETFs) exist.
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An ETF is an investment that contains a basket of securities, usually with a specific focus. For instance, if you want to mirror the performance of a major index, there are index funds. Likewise, if you'd like to buy a portfolio of value stocks, semiconductor stocks, or stocks focused on India, there are ETFs available. With more than 3,000 publicly traded ETFs, there's a good chance there's an ETF for pretty much any investment strategy you can think of.
Exchange-traded funds offer a number of advantages, such as instant diversification or concentration with the click of a button. They're also more liquid than mutual funds in the sense that you can buy and sell ETFs during the course of a normal trading day, as opposed to mutual funds, where all transactions are executed at a single price once daily.
For investors who may not have the time to research individual companies, can't stomach a volatile market, or who simply want to complement their existing investment strategy, ETFs can be a smart place to turn.
For the second half of 2023, investors can confidently buy the following five magnificent ETFs hand over fist.
1. and 2. Vanguard S&P 500 ETF & SPDR S&P 500 ETF Trust
The first two phenomenal ETFs that are surefire buys for long-term investors are index funds: the Vanguard S&P 500 ETF (VOO 1.00%) and SPDR S&P 500 ETF Trust (SPY 0.95%).
The reason I've chosen to discuss these index funds together is because they both attempt to mirror the performance of the benchmark S&P 500 (^GSPC 1.02%). Instead of having to buy 503 separate components -- three of the S&P 500's representative companies have dual classes of shares, thus why it's 503 components and not 500 -- the Vanguard S&P 500 ETF and SPDR S&P 500 ETF Trust provide instant diversification with the click of a button.
Investing in these two ETFs makes sense for two key reasons. First, the U.S. economy spends much more time expanding than contracting. There have been a dozen recessions since World War II, and all 12 have lasted just two to 18 months. By comparison, most expansions have gone on for multiple years, if not a decade. Over time, an expanding U.S. and global economy will benefit patient investors.
The other reason these two ETFs can be cornerstones for your portfolio is because time, historically, heals all wounds. Based on a report issued by market analytics company Crestmont Research, the S&P 500 hasn't had a rolling 20-year period that didn't produce a positive total return, including dividends, when back-tested to 1900. That's 104 rolling 20-year periods (1919-2022) all generating a profit for long-term investors.
Though the Vanguard S&P 500 ETF's lower net expense ratio (0.03% vs. 0.09%) gives it a slight edge over the SPDR S&P 500 ETF Trust, both are excellent ETFs to anchor your portfolio.
3. VanEck Gold Miners ETF
For those of you wanting to be a bit more daring and concentrated with your investments, the VanEck Gold Miners ETF (GDX 0.73%) is a smart choice for the second half of 2023. Though it has a considerably higher net expense ratio (0.51%) than index funds, the 1.61% yield investors are receiving more than offsets any management-related expenses.
As you can probably surmise from the name of this ETF, it's an optimistic bet on companies mining the lustrous yellow metal. While there are a number of gold-mining ETFs to choose from, the VanEck Gold Miners ETF is highly liquid, has close to $12 billion in net assets, and its top holdings are the largest gold-mining companies and precious-metal royalty businesses around.
Buying gold-mining stocks, rather than physical gold, has its advantages. Whereas gold doesn't offer a dividend, many of the largest precious-metal mining companies do pay a dividend to their shareholders. Further, gold companies can adjust their capital expenditures or growth strategies to alter their key performance metrics. In other words, they're a leveraged play on spot price movements in physical gold.
There is no shortage of upside catalysts for gold, including ongoing short-term economic uncertainty, the core U.S. inflation rate still sitting well above historic norms, and the fact that gold stocks tend to outperform during the early stages of a bull market. Regardless of whether we're in a new bull market or facing a coming short-lived recession, gold stocks are well-positioned to succeed.
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4. iShares Biotechnology ETF
The fourth magnificent ETF you can confidently add to your portfolio for the second half of 2023 is the iShares Biotechnology ETF (IBB 0.65%). Since biotech stocks aren't known for their dividends, the yield of the iShares Biotechnology ETF (0.22%) isn't going to cover the fund's net expense ratio (0.45%).
However, investors aren't buying a biotech ETF to collect income. They're buying to take advantage of the predictable nature of the healthcare sector, the growth potential of biotech companies, and, at the moment, historically inexpensive valuations.
The beauty of the healthcare sector is that it's highly defensive. As much as we'd prefer not to become ill during recessions or economic slowdowns, we don't get that choice. Demand for prescription drugs is going to remain consistent no matter how well or poorly the U.S. economy performs. That's good news for drug companies that count on predictable operating cash flow to thrive.
Biotech stocks also allow investors to ride a wave of scientific innovation. Even though a sizable percentage of late-stage clinical trials will fail to meet their primary endpoint, those trials that are successful (and eventually approved by the U.S. Food and Drug Administration) can help investors take advantage of the exceptional pricing power and growth opportunities associated with brand-name drugs. Since the iShares Biotechnology ETF has 266 holdings, the failure of a single clinical trial can't sink this fund.
Lastly, biotech stocks are relatively inexpensive. Though the forward price-to-earnings (P/E) ratio of 15.2 for biotech stocks is about 50% higher than where things stood in 2021, it's still well below the forward P/E of 19.8 for the broad-based S&P 500. Biotech stocks look like a bona fide bargain.
5. Schwab U.S. Dividend Equity ETF
The fifth magnificent ETF to buy hand over fist for the second half of 2023, which you can also confidently hang onto for years, if not decades to come, is the Schwab U.S. Dividend Equity ETF (SCHD -0.10%). This dividend stock-focused ETF has more than $49 billion in net assets, a yield of almost 3.6%, and a minuscule net expense ratio of 0.06%.
Publicly traded companies that pay a regular dividend are normally profitable on a recurring basis and time-tested. The Schwab U.S. Dividend Equity ETF is packed with 104 companies that have a rich history of profits and have demonstrated to Wall Street they can navigate downturns and come out stronger on the other end.
Dividend stocks also have a habit of running circles around their non-paying counterparts. Roughly a decade ago, J.P. Morgan Asset Management, the wealth management division of money-center bank JPMorgan Chase, issued a report that compared the annualized returns of publicly traded companies that paid and grew their payouts to public companies without a dividend over a 40-year stretch (1972-2012). As expected, the income stocks vastly outperformed the non-payers: 9.5% versus 1.6% over four decades.
Since the Schwab U.S. Dividend Equity ETF is filled with mature businesses, perhaps the best aspect of this fund is its low volatility. Over the past five years, its monthly beta of 0.81 suggests it's only 81% as volatile as the S&P 500. In other words, if the S&P 500 loses 1% in a given day, the Schwab U.S. Dividend Equity ETF would be expected to decline by a more modest 0.81%.
For conservative investors wanting above-average income, modest capital appreciation potential, and a good night's sleep, the Schwab U.S. Dividend Equity ETF is a perfect choice.
