Exchange-traded funds, or ETFs, are a popular investment option that offer numerous benefits to investors. ETFs are collections of securities that trade on stock exchanges like individual stocks but track the performance of an underlying index, basket of securities, or commodity. They have lower fees, higher liquidity, and greater tax efficiency than most other types of funds.
However, with over 3,000 active U.S.-based ETFs to choose from, investors may feel overwhelmed by the variety and complexity of the market. Some ETFs cover the entire market or specific sectors, themes, or strategies.
Some investors may prefer exchange-traded funds that focus on traditional wealth-building strategies, like dividend growth or value investing. Others may opt for ETFs that employ more aggressive strategies, like covered calls.
To help investors navigate the ETF landscape, I combed through the available options in the areas of dividend growth, monthly income, and S&P 500 index tracking, which are three proven wealth-building strategies. The funds discussed below have been top performers in their respective fields for extended periods.
Here's the list of the funds that stood out from the crowd, along with a brief overview of their most important metrics.
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Dividend growth
The WisdomTree U.S. Quality Dividend Growth Fund (DGRW 0.38%) focuses on dividend growth, rather than dividend yield. It tracks the WisdomTree U.S. Quality Dividend Growth index, which selects companies based on their earnings quality, return on equity, and expected dividend growth. The DGRW has a moderate expense ratio of 0.28% and an above-average yield of 1.84%.
Over the past five years, it handily outperformed the S&P 500 Dividend Aristocrats® index (the term Dividend Aristocrats® is a registered trademark of Standard & Poor’s Financial Services LLC) by approximately 25%. Turning to the specifics, the DGRW's total return on capital over this period was 105.8%, which was only 3% lower than the total returns of the benchmark S&P 500. This WisdomTree dividend growth ETF screens as a potent capital appreciation and income vehicle.
Monthly income
The JPMorgan Equity Premium Income ETF (JEPI 0.30%) employs a covered-call strategy to generate income from both dividends and option premiums. It invests in a portfolio of large-cap U.S. stocks and sells call options to enhance its income potential.
Because of its covered-call component, the fund is considered to be actively managed. The JEPI provides shareholders with monthly income.
The JEPI has a relatively low expense ratio of 0.35%, as well as a noteworthy yield of 9.11% at the time of this writing. Since its inception in 2020, it has delivered total returns on capital of 52.4% (assuming dividends were reinvested and before taxes).
However, the JEPI has underperformed the S&P 500 over this period in terms of total returns, which isn't surprising for a fund specifically designed to generate passive income. That being said, most funds in the same category have historically lost shareholders money due to the mechanics of the covered-call strategy.
S&P 500 index
The Vanguard S&P 500 ETF (VOO 1.00%) invests in the 500 largest U.S. companies that make up the S&P 500 index. It's one of the most popular and cost-effective ways to gain exposure to the entire U.S. stock market. This Vanguard fund has an exceptionally low expense ratio of 0.03%, a respectable yield of 1.48%, and delivered a remarkable return of 458% since it was launched in 2010.
Several other ETFs follow the same index and offer similar features, so you have plenty of options to choose from when looking for an S&P 500 anchor for your portfolio. However, the VOO stands out because it's managed by Vanguard, which is a unique company in the investment industry.
Vanguard is owned by its investors, which means it can focus on providing the best value and service to its customers. This is a key feature most other ETF providers simply can't match.
