While U.S. markets have not done much of anything this year, 2015 will go down as another banner for the exchange-traded fund industry. In November, ETFs around the world added $28.2 billion in new assets, with the best ETFs coming in U.S. equity — they saw $21.4 billion of inflows, according to BlackRock data.
Yes, the largest ETF market is on pace for another year of record asset-gathering. And more than 200 new ETFs have come to market this year, confirming that the ETF business continues to experience exponential growth. Better yet, the quality of new products is improving as some rookie ETFs, with the appropriate seasoning, have the potential to become some real powerhouses.
Still, some ETFs are better than others.
With 2016 just around the bend, investors are (rightfully) looking to rethink and restock their portfolios — and that means hunting for the best ETFs to give a portfolio that right mix of potential and diversification.
It’s not exactly easy to identify the best ETFs out there, considering that the markets are digesting a rate hike from the Federal Reserve. But we’ve done our homework and highlighted several funds that should lead investors forward in 2016.
In no particular order, here are the seven best ETFs to buy for 2016:
Best ETFs for 2016: Direxion Daily Total Bond Market Bear 1x Shares (SAGG)
Expenses: 0.65%, or $65 annually for every $10,000 invested*
Total bond market ETFs, such as the Vanguard Total Bond Market ETF (BND), are wildly popular with advisors and investors. Some investors even think total bond market funds are the best ETFs in the fixed income universe.
That does not mean, however, that total bond market ETFs are immune from rising rates. Quite the contrary. What an investor might think are the best ETFs in the bond realm is usually loaded with rate-sensitive Treasurys.
Direxion Daily Total Bond Market Bear 1x Shares (SAGG) tries to deliver the daily inverse performance on a percent-for-percent basis of the widely followed Barclays Capital Aggregate Bond Index.
In short, it’s a short play on bonds.
The nifty thing about SAGG is it is not a leveraged ETF, so even conservative investors can consider a small position in this fund, which might be the best ETF to use to bet against bonds.
*After fee waiver
Best ETFs for 2016: SPDR Barclays Convertible Securities ETF (CWB)
With the Federal Reserve raising interest rates for the first time in nearly a decade — perhaps taking rates as high as 1.25% by the end of 2016 — fixed income investors are hearing plenty about which corners of the bond market are vulnerable to hawkish Fed policy.
Well, how about hearing about a fund that could actually thrive as rates rise?
The SPDR Barclays Convertible Securities ETF (CWB) could easily don that moniker because historical data shows that convertible bonds are usually the best-performing bonds during rising-rate environments.
As the name implies, convertibles are bonds that can be converted into equity of the issuing company. That means convertible bonds and ETFs such as CWB are often more sensitive to the whims of equity indices than traditional bond benchmarks.
Best ETFs for 2016: PowerShares S&P 500 Low Volatility Portfolio (SPLV)
In the search for the best equity-based ETFs for 2016, investors might do well to cozy up to low-volatility stocks in what could be another roller coaster year.
Some market participants are already endorsing the low-vol trade for next year, confirming PowerShares S&P 500 Low Volatility Portfolio’s (SPLV) potential as one of 2016’s best ETFs. Via a Yahoo Finance report:
“Investors should brace for larger market fluctuations by choosing low volatility stocks rather than those of companies that are more market sensitive, said Chad Morganlander, portfolio manager at Stifel Nicolaus’ Washington Crossing Advisors.”
And just because SPLV promises to dampen volatility does not mean the ETF is loaded with rate-sensitive utilities. Utilities account for just 11.2% of SPLV’s weight, making the group the ETF’s fifth-largest sector allocation across 100 stocks.
Best ETFs for 2016: iShares MSCI USA Quality Factor ETF (QUAL)
The $1.8 billion iShares MSCI USA Quality Factor ETF (QUAL) is a perfect ETF for conservative equity investors because the quality — one of the most revered investment factors — has curiously lagged the growth and momentum factors in 2015.
QUAL, which is off 0.8% this year, is not a boring ETF as evidenced by its nearly 21% weight to technology stocks. The ETF’s 125 holdings are selected based on return on equity, earnings variability and debt-to-equity — traits that further cement QUAL’s best ETF potential. Well-known holdings in QUAL include Dow Jones Industrial Average components Johnson & Johnson (JNJ), Microsoft (MSFT) and Apple (AAPL).
Quality Factor’s scant 0.15% in expenses is well below the average expense ratio for large-cap smart beta ETFs.
Best ETFs for 2016: WisdomTree International Hedged Quality Dividend Growth Fund (IHDG)
Investors should not confine their search for the best ETFs to U.S. funds — not when developed-market monetary policies are diverging and some ex-U.S. developed markets are offering impressive dividend growth.
The WisdomTree International Hedged Quality Dividend Growth Fund (IHDG) seizes on the latter theme as a dividend growth play on the widely followed MSCI EAFE Index. IHDG tracks the WisdomTree International Hedged Quality Dividend Growth Index, which emphasizes the growth and quality factors.
“The growth factor ranking is based on long-term earnings growth expectations, while the quality factor ranking is based on three year historical averages for return on equity and return on assets,” according to WisdomTree.
Consumer sectors combine for over 41% of IHDG’s weight. Bolstering the fund’s best ETF status is a more than 30% combined weight to the U.K. and Switzerland, two of the best ex-U.S. dividend growth markets.
Best ETFs for 2016: PowerShares FTSE RAFI US 1000 Portfolio (PRF)
Earlier this month, we highlighted PowerShares FTSE RAFI US 1000 Portfolio (PRF) as one of the best ETF alternatives to the S&P 500, saying that this ETF has a long history of outperforming standard S&P 500 ETFs during pronounced bull markets due to its robust mid- and small-cap exposure.
Unlike S&P 500 ETFs, PRF is not cap-weighted. None of its holdings command a weight of more than 2.85%. Top 10 holdings include Dow components Exxon Mobil (XOM), General Electric (GE) and JPMorgan Chase (JPM).
PRF could be one of 2016’s best ETFs because of its highly cyclical tilt, which could be a benefit during a time of rising interest rates. Financial services, consumer discretionary and technology stocks — all sectors that have historically performed well when rates rise — combine for 45% of PRF’s weight.
Best ETFs for 2016: iShares Russell Top 200 Growth ETF (IWY)
As we noted earlier, the growth factor has outperformed more conservative investment factors this year. In fact, the growth factor has been a nice multiyear run as the iShares Russell Top 200 Growth ETF (IWY) has outperformed the S&P 500 by 900 basis points over the past three years.
That certainly makes iShares Russell Top 200 Growth ETF (IWY) one of the best ETFs to buy … at least in the rear-view mirror.
But it’s also attractive looking forward.
Due to the fact that IWY focuses on large-caps such as Apple, Microsoft and Amazon (AMZN), the fund lacks some of the volatility found with even the best ETFs in the growth arena. IWY was actually slightly less volatile than the S&P 500 over the past three years.
IWY, which follows the Russell Top 200 Growth Index, is heavily allocated to the usual suspects among growth stocks, as the technology, consumer discretionary and healthcare sectors combine for about 60% of the ETF’s weight.
As of this writing, Todd Shriber was long JNJ.