Stock-picking isn't for everyone. In fact, the most successful long-term investor of all time, Warren Buffett, has said many times that the best investment for most people would be simply averaging into an index fund over time. With that in mind, if you don't have the time or desire to research and select individual stocks, here's a guide to some of the best exchange-traded funds, or ETFs, you can add to your portfolio in 2017.
What is an ETF?
An ETF is like a mutual fund, but the major difference is that it trades on a major stock exchange. Most ETFs track a certain index of stocks, bonds, or commodities. For example, a Russell 2000 index fund would own the 200 stocks that make up that index.
Image source: Getty Images.
What to look for in the best ETFs
First and foremost, you want your ETFs to be cheap. All other things being equal, even a difference of a few dollars per year can make a big impact on your long-term returns.
To determine the cost of an ETF, you need to look at its expense ratio, which tells you the total cost of investing in the fund as a percent of your investment, every year. For example, an expense ratio of 0.5% tells you that you'll pay $5 annually for every $1,000 you invest.
Also, you want to make sure the ETF does a reasonably good job of tracking its intended index. The performance history isn't likely to match that of the index exactly -- after all, stocks need to be bought and sold to maintain the desired ratios, which is nearly impossible to do with 100% efficiency. Plus, you need to account for the fees that come out of the ETF. On the websites of most ETF issuers, you can find a chart of the ETF's performance over various lengths of time, as well as that of its underlying index.
Warren Buffett's suggestion
Warren Buffett has said several times that the best overall investment most people can make is a low-cost S&P 500 index fund. Doing so would essentially be a bet on the long-term success of American business, without relying too much on the success of any individual company.
My favorite in this category is the Vanguard S&P 500 ETF (VOO 0.77%). The fund owns the 500 stocks in the index in their appropriate weights, and charges a rock-bottom expense ratio of just 0.05%. In other words, for every $10,000 you invest, you'll pay just $5 in fees per year.
Other smart choices for a well-rounded portfolio
While I tend to agree that an S&P 500 index fund, like the Vanguard example, is an excellent core holding for a portfolio of ETFs, there's nothing wrong with allocating some of your capital to other indices. For example, small-cap stocks have historically outperformed large-cap stocks over long periods of time, so a Russell 2000 ETF could be a good investment. Or if you're worried more about income than long-term growth, a bond ETF could be the way to go.
With that in mind, here are some good ETFs to check out in a variety of categories.
|
ETF Name/Symbol |
Type of Investment |
Index |
Expense Ratio |
|---|---|---|---|
|
Vanguard Small-Cap ETF (VB 1.53%) |
Small-Cap Stocks |
CRSP US Small Cap Index |
0.08% |
|
iShares Core Russell US Growth (IUSG 0.51%) |
Growth Stocks |
Russell 3000 Growth Index |
0.07% |
|
Schwab US Large-Cap Value ETF (SCHV 1.42%) |
Value Stocks |
Dow Jones U.S. Large-Cap Value Index |
0.06% |
|
Vanguard FTSE Developed Markets ETF (VEA 2.69%) |
Foreign Stocks |
FTSE Developed All Cap ex US Index |
0.06% |
|
Schwab Emerging Markets Equity ETF (SCHE 2.12%) |
Emerging Markets |
FTSE Emerging Index |
0.13% |
|
Vanguard High Dividend Yield ETF (VYM 0.97%) |
Dividend Stocks |
FTSE High Dividend Yield Index |
0.09% |
|
Vanguard Long-Term Government Bond ETF (VGLT 0.60%) |
Treasury Bonds |
Bloomberg Barclays US Long Government Float Adjusted Index |
0.10% |
|
SPDR Bloomberg Barclays Intermediate-Term Corporate Bond ETF (NYSEMKT: ITR) |
Corporate Bonds |
Bloomberg Barclays US Intermediate Corporate Bond Index |
0.12% |
Data obtained from each ETF's website.
It's important to mention that this list is meant as a good starting point, and not as an exhaustive list of all ETFs worth buying in 2017. There are many other choices that could work in your portfolio, including ETFs that track different sectors, more specialized indexes (such as small-cap value stocks, for example), and various types of bonds and commodities. The guidelines discussed earlier can be applied to any type of ETF to find the best in whatever category you desire.
ETFs to avoid
If exposure to the S&P 500 is good, double or triple exposure should be even better, right? Wrong. Over the past decade or so, leveraged ETFs have become increasingly popular. These products either use derivatives or borrowed money to amplify their exposure to a certain index, or track the inverse of that index's performance.
While extra leverage may sound good in principle, it rarely works out well over the long term. Here's a thorough, mathematical explanation why, but in a nutshell, these are designed as short-term investment vehicles, rather than buy-and-hold investments.
It’s useful to know what an ETF is -- your portfolio might thank you.
