If you’re not “looking for an edge” in your portfolio, you’re lying to yourself. Everyone and anyone could stand to do a little better than they already are.
However, while you could bolster your returns with an aggressive small-cap tech play or a risky short, wouldn’t you rather tack on some extra percentage points without putting your neck on the block?
I sure would.
Most people tout exchange-traded funds as a safe way to add diversification to your portfolio. I should know — I’m one of them. But ETFs aren’t just a way to diversify — they can be used to supercharge your returns.
You see, some of the market’s best ETFs can often act as less-risky ways to add significant growth or gobs of income, and they also can provide exposure to alternative assets that aren’t correlated to the rest of the market — that way you can get some potential zag when stocks decide to zig.
The best part? While it’s easy to throw away 1%, even 2% of your performance in fees to access these strategies via mutual funds and some more expensive ETFs … you don’t have to do that. Several cheap ETFs out there can do the job perfectly.
To wit, here are seven of the best ETFs you can buy to boost returns without breaking the bank.
Best ETFs: SPDR S&P Biotech ETF (XBI)
Expense Ratio: 0.35%
If you have friends who invest, inevitably you’ll be forced to hear about some biotech stock that doubled overnight. What a strategy! What savvy investing!
Not exactly. For most individual investors, biotech “investing” is akin to gambling — there’s precious little information and no real way for us to handicap upcoming drug approvals, so you push your chips on a number and hope for the best.
The SPDR S&P Biotech ETF (XBI) won’t necessarily double overnight, but it can (and usually does) deliver market-trouncing returns year after year, riding these collective power of these explosive stocks to average annual gains of more than 30% over the past five years!
Part of XBI’s magic is that it’s “equal weighted.” The holdings don’t have perfectly equal weight, but all stocks in the XBI have a relatively similar say in how the fund performs. Top holdings Anacor Pharmaceuticals (ANAC) and Exelixis (EXEL) make up just 2% and 1.6% of the fund, respectively. Most hover around 1%, versus some funds where one stock might account for 15% of the fund, and another just a few basis points. So any sudden pop can really carry the XBI forward.
Another key to success: rebalancing. See, ETFs have certain standards that say which stocks stay and which stocks go. So in all funds, you occasionally lose stocks because they’ve fallen too far in market cap or are otherwise weaker than they once were, and then they’re replaced by other up-and-comers.
That can happen in XBI, sure, but you also see an outsized number of stocks added because an XBI component was simply bought up — meaning the fund benefited from a big buyout pop, then replaced that stock with another potential powerhouse.
That, my friends, is a win-win.
Best ETFs: Global X SuperDividend ETF (SDIV)
There is absolutely nothing subtle about this play.
Many funds that have the word “dividend” in their names fail to impress when you actually look at headline yields. Yes, funds that yield 2% and 3% might have other positive traits (in fact, some dividend funds merely use dividends as part of a quality screen), but sometimes, you’re just looking for raw yield.
If you’re in that camp, and you haven’t yet looked into the Global X SuperDividend ETF (SDIV), start brushing up.
The SDIV holds 100 of some of the highest-yielding dividend stocks on the planet. The fund is truly global in name, with just 30% invested in the U.S., with another 18% or so in Australia, 8% in Britain, 7% in France, 7% in Singapore … you get the idea.
To achieve its nearly 7% dividend yield, SDIV is heavy in real estate investment trusts, mREITs and utilities, boasting top holdings such as China’s Evergrande Real Estate and Finnish telecom Elisa Oyj.
Just note that SDIV has been pretty volatile since its 2011 launch, and currently is in the middle of a nearly 20% downswing dating back to 2014. Of course, for some, battered prices in such a high-yielding fund might smell of a perfect opportunity.
Best ETFs: PureFunds ISE Cyber Security ETF (HACK)
The PureFunds ISE Cyber Security ETF (HACK) is the most expensive ETF on this list, but in its defense, it’s also one of the most intriguing.
The HACK, as its name suggests, is a play on cybersecurity companies dealing with antivirus technology, firewalls, you name it. Top holding Fortinet (FTNT), for instance, provides a number of security solutions — threat protection, firewalls, secure WAN — for the enterprise and the government. Another major holding, Imperva (IMPV), helps to protect web apps and databases.
I’m willing to bet that these services might be increasingly in demand as headlines like “Hacking of Government Computers Exposed 21.5 Million People” and “Banking hack heist yields up to $1 billion” pile up.
Most investors might have a difficult time figuring out exactly which cybersecurity firms will come out atop the pile. After all, not every last antivirus provider is going to be rolling in the money – some companies simply will be better positioned than others.
HACK takes the guesswork out of this industry.
The fund currently boasts 21% returns since late 2014 inception vs. 3% gains for the broader market, and chances are, the ever-growing demand for cybersecurity solutions will make sure HACK continues to outperform in the future.
Best ETFs: iShares U.S. Preferred Stock ETF (PFF)
Most investors hold some sort of fixed-income assets (bonds) so that their eggs aren’t completely in the stock basket, and so they can earn some sure-fire income.
Of course, if you decide to play it safe and resign yourself to highly rated debt like Treasuries or investment-grade corporate debt, you’re looking at yields in the 2% to 4% range. You can get a bit higher … but you have to trust in much sketchier “junk” debt with a far higher chance of default.
Why do that, though, when you could just dip into preferred stocks and enjoy roughly 6% yields like clockwork?
I’ve touted the power of the iShares U.S. Preferred Stock ETF (PFF) and preferred stocks in general for years now, and for good reason. These “stock-bond hybrids” offer very stable, very significant income, and PFF does it while charging extremely low expenses.
PFF isn’t going to do much for you on the capital gains side most years — PFF traded just under $40 five years ago, and it’s trading for around $39.50 today, with some relatively modest peaks and valleys in between.
But in that time, PFF has provided a total return of about 6% per year, mostly in the form of its monthly cash dividend that you can either reinvest, or if you’re a retirement investor, use to help take care of regular expenses. Either way, PFF is one of the best ETFs for some serious income punch.
Best ETFs: WisdomTree Europe Hedged Equity Fund (HEDJ)
Provides: Europe With a Twist
It pays to have at least some exposure to European equities (and other international stocks, for that matter), simply because the U.S. isn’t always going to win the day. And investors usually get that exposure through funds like the Vanguard FTSE Europe ETF (VGK) or the iShares MSCI Eurozone ETF (EZU).
However, the most popular ETF as of right now is one that puts a little spin on the region — the WisdomTree Europe Hedged Equity Fund (HEDJ).
The HEDJ, like VGK and EZU, is invested mostly in large-cap companies from developed European countries, sporting holdings like Spain’s Telefonica (TEF) and Belgium’s Anheuser-Busch InBev (BUD). However, HEDJ’s strategy is somewhat unique in that it attempts to hedge against a weak/weakening euro by investing mostly in companies that derive a significant portion of their revenues from overseas.
That strategy has absolutely killed it over the past year — a 52-week span in which the euro has gone from being worth roughly $1.33 to about $1.10 currently. Investors in the HEDJ have enjoyed 19% gains in that time, while the VGK has essentially stayed flat.
This is far from a strategy you can sit on and forget about, but considering that the Federal Reserve will likely increase interest rates sometime before 2015’s out, and considering that Europe is likely to continue with its stimulus measures, a strong-dollar environment should endure. That makes HEDJ one of the best ETFs you can use to supercharge the international portion of your portfolio.
Best ETFs: United States Oil Fund (USO)
Provides: Commodity Exposure
In full disclosure, I’m currently long the United States Oil Fund (USO).
Also in full disclosure, I typically avoid commodity funds like I avoid vegetables at a Super Bowl spread.
Oil prices have been decimated over the past year or so, and at less than $44 per barrel, West Texas Intermediate sits some 60% beneath 2013 highs around $110. You can thank the aforementioned strong dollar for that, as well as soft demand and the Middle East keeping production up to put the hurt on U.S. firms.
However, oil bulls could get some respite. Saudi Arabia is finally cutting back on its oil production, and demand could get a kick in the pants if China is successful in stimulating its economy. And while U.S. oil rig counts have been ticking up a bit lately, they’re still down heavily year-over-year, and “analysts believe the rig count will again start declining in the coming weeks,” which in theory should help crimp supply and bolster oil prices.
USO, which tracks West Texas Intermediate light prices, is one of the easiest ways for investors to play a snap-back in oil prices. You could try leveraged plays, but beware — if the U.S. dollar remains strong, while that would be bullish for the aforementioned HEDJ, it also could keep oil prices in check. USO is a much safer way to patiently wait out a rebound in oil.
Best ETFs: Vanguard S&P 500 ETF (VOO)
Provides: Protection From Your Ego
Why would investors simply want to track the market? Isn’t the whole point of picking stocks and building your own portfolio to beat the market?
Sure, but we’re all terrible at it.
The delightfully headlined Motley Fool article “This Chart Shows Just How Terrible Of An Investor You Are” tells part of the tale, and the chart therein tells the rest: When left to our own devices, individual investors like you and I are garbage, averaging 2.1% annually from 1992-2011 vs. 7.8% for the S&P 500.
The long-term game is one of patience, and one of the best bets you can make (especially if you have many, many years to retirement) is putting a large portion of your portfolio into the broader market and never looking back. By doing so, you throw a ton of nasty things out of the window — our inability to time the market, outsized risk from individual holdings tanking and plain ol’ human emotion.
The Vanguard S&P 500 ETF (VOO) is simply the cheapest ETF to get the job done, at merely $5 for every $10,000 invested annually. That’ll get you your Apple (AAPL), your Microsoft (MSFT) — all the big boys in the index, generating the majority of its returns from growth, but still getting a couple percentage points a year in income too.
It’s not fun, it’s not sexy, but S&P 500 funds are among the best ETFs you can buy to improve your long-term prospects.