The 10 best ETFs on the planet don’t have much in common, but they do share two traits:
- They’ll rarely be the 100%, exact, best, perfect ETF for any given moment.
- They’re all still pretty darn great regardless.
The U.S. exchange-traded fund and exchange-traded product world is closing in on 2,000 strong. As of June 2016, the country boasted 1,931 ETFs and ETPs that had amassed more than $2.2 trillion in assets, according to research and consultancy firm ETFGI.
That sheer wealth of product diversity means that there’s an ETF for just about every niche in the investable market. If you can think of it, it probably exists. And if you happen to jump into it at the perfect moment, you’ll make a killing.
But most of us aren’t market timers. We’re investors who might pull off a swing trade or two in our brokerage account, but for the most part, we’re buy-and-holders that have a limited amount of money that we need to simply let ride for a while. Thus, the best ETFs for us are going to be funds that are built for longer-term performance.
You can get there in several ways. Some ETFs are simply designed to perform well in just about any kind of market environment. Other ETFs are just perfectly targeted plays on established mega-trends that should continue to run for the next few years. A few great ETFs aren’t even geared toward sheer outperformance, but simply achieving good performance while minimizing risk.
We’ll look at some of each kind in this list of the world’s 10 best ETFs:
The Best ETFs on the Planet: Vanguard S&P 500 ETF (VOO)
Type: Broad U.S. Index
Expenses: 0.05%, or $5 annually for every $10,000 invested
Any list of “best ETFs” has to include an S&P 500 fund of some sort. It’s the premiere stock index in the U.S., and a benchmark for American equity performance. You can argue about how much it actually returns — the widely touted number is 10% compounded annually, though if you factor in inflation, it’s more like 7% — but you can’t argue how difficult it is to beat. Depending on the year and the study, we’re bombarded with stats like …
- 66% of fund managers can’t match S&P results
- Fewer than 1 in 5 large-cap funds beat the S&P 500
- Nearly 90% of large-cap managers underperformed the S&P 500 over the past five years
- Only four fund managers consistently beat the S&P 500
Chances are, you’re not a better stock picker than most fund managers, so you’re not going to beat the market. But you can still do well to just match the market with a portfolio that includes at least some direct exposure to the S&P 500.
If you’re not familiar, the VOO is one of three S&P 500-tracking ETFs — the other two are the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) and the iShares Core S&P 500 ETF (NYSEARCA:IVV). Each operates slightly differently, but at the end of the day, each provides very honest, tight tracking of the S&P 500. The VOO is simply the cheapest at just 0.05% in expenses, which accounts for most of the slight performance edge over its ETF brethren.
But again, whether it’s VOO, IVV or SPY, you should have at least some of your nest egg in the S&P 500.
The Best ETFs on the Planet: PowerShares S&P 500 High Dividend Low Volatility Portfolio (SPHD)
I love a fund that actually backs up its name.
The PowerShares S&P 500 High Dividend Low Volatility Portfolio (NYSEARCA:SPHD) is your quintessential “smart-beta” fund. Take a basic index, then slice it and dice it, and voila — if you’ve done it right, you should have something better than the original.
In this case, SPHD takes the S&P 500 and hones in on 50 high-income stocks that also have traded with little volatility. The result? Well … a portfolio of 50 high-income stocks that trade with little volatility. The yield currently stands around 3.3%, which isn’t monstrous, but is pretty generous compared to many dividend ETFs. It’s certainly a nice number when you consider SPHD is avoiding investing in a lot of stocks whose yields are high because their risk is high, too.
SPHD hasn’t been around for very long, coming to market in late 2012, but so far, it’s a winner. While 2013 saw PowerShares’ offering lag many of its counterparts amid a rip-roaring market, 2014, 2015 and the first eight months of this year have seen SPHD clobber most of its peers. The most telling performance was in 2015, in which SPHD threw off about 5% in total returns while other big names like Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) and SPDR S&P Dividend ETF (NYSEARCA:SDY) ended up in the red, even with dividends accounted for.
SPHD is likely going to lag in years where the market is simply sprinting, but it’ll be one of the best ETFs to own through thick and thin.
The Best ETFs on the Planet: First Trust Dow Jones Internet Index Fund (FDN)
Type: Industry (Internet)
The internet has been one of the greatest investing mega-trends of the past decade, and barring some unforeseen technological leap (or a reversion to the Dark Ages), that’s going to continue.
That’s also why the First Trust Dow Jones Internet Index Fund (NYSEARCA:FDN) has been one of the best U.S. equity ETFs of the past 10 years, and why you can bank on FDN to continue lining investors’ pockets for years to come.
The main flavor in this ETF’s special sauce is that a component “must generate at least 50% of its annual sales/revenues from the internet.” Then FDN filters out skeezy speculative stocks through a few basic screens such as a minimum $100 million market cap and three-month average closing price above $10. That’s how you get top holdings like Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), as well as a host of other world-beating stocks that keep growing as the world moves increasingly online.
If you think this trend is near its zenith, wake up and smell something that ain’t America. Sure, U.S. penetration is near 90%, but global penetration isn’t even at 50% yet! “But FDN is comprised of U.S. stocks.” Yes, they have to be based in America, but these companies are increasingly spreading their tentacles across the world. Heck, nearly 85% of Facebook’s users are outside the U.S. and Canada.
Broad technology funds are a good way to go, but FDN is a great way to go.
The Best ETFs on the Planet: iShares U.S. Aerospace & Defense ETF (ITA)
Type: Industry (Aerospace and Defense)
On the evening of Aug. 19, Reuters laid out a Defense Department Inspector General’s report that said the U.S. Army “made $2.8 trillion in wrongful adjustments to accounting entries in one quarter alone in 2015, and $6.5 trillion for the year.”
Trillions. With a “T.” As in “Tholy crap.”
I almost had to laugh come Monday trading, when defense stocks barely batted an eye. Of course they didn’t move. While you’ll argue whether it’s too much or too little depending on your political bent, military spending is alive and well. Base defense budgets have hit historic highs under President Obama, and no one is particularly worried about defense spending going down after this November, as Hillary Clinton and Donald Trump are likely to be military-fund-friendly.
It’s this kind of environment that has made the iShares U.S. Aerospace & Defense ETF (NYSEARCA:ITA) one of the best-performing ETFs over the past decade. Companies like Lockheed Martin Corporation (NYSE:LMT) and General Dynamics Corporation (NYSE:GD) have thrived by producing solutions funded by a thick military wallet.
A military spending scandal is unlikely to change the winds. Because whether it’s the war on terror, global conflicts or just the pressing need to keep China in check, the U.S. has legitimate reasons aplenty to keep throwing money into the Armed Forces.
Unless the world’s pageant contestants’ wishes for world peace finally bear fruit, expect America’s aerospace and defense companies to continue doing a brisk business.
The Best ETFs on the Planet: SPDR S&P Biotech ETF (XBI)
Type: Industry (Biotechnology)
Biotechnology admittedly isn’t the glaringly obvious sure thing it once was, and it’s been that way ever since Hillary Clinton’s infamous Sept. 21, 2015, tweet: “Price gouging like this in the specialty drug market is outrageous. Tomorrow I’ll lay out a plan to take it on. –H”
The tweet came in response to bubbling news coverage over Turing Pharmaceuticals, which jacked up the price on Daraprim — a treatment for a parasitic infection — around 5,500% to $750. The message: Biotech stocks won’t have infinite pricing power forever.
There’s been follow-up, too: Valeant Pharmaceuticals Intl Inc (NYSE:VRX) had to face the Senate in April for aggressively hiking prices on its drugs. Now Mylan NV (NASDAQ:MYL) is answering to the government soon after a story showed that EpiPen prices have rocketed 400% since 2008 with no significant improvements to the treatment. This scandal, too, is rocking biotechs — including recommendation SPDR S&P Biotech ETF (NYSEARCA:XBI).
XBI at one point lost nearly 50% from its July 2015 highs through the February 2016 lows, with most of that coming after Clinton’s tweet. Now it’s on the ropes again. So … why tout XBI, or any other fund in the space, for that matter?
For one, biotech stocks still remain one of the most explosive ways to play the healthcare megatrend, with increasingly large piles of money being thrown at treatments for everyday maladies, cures for rare diseases and drugs that simply help people live longer, fuller lives. Yes, biotechs won’t be able to blindly press buttons on their calculators and charge whatever number comes up, but it’s naïve to think there won’t be ample profits for the companies that develop treatments that no one else can.
Also, XBI specifically is the ideal way to invest in the space. For one, it’s equal-weighted. So instead of being overweight in a handful of larger, slower-growth biotechs, XBI is evenly affected by all sorts of companies, including smaller, more explosive biotech stocks. Plus, the space is thick with M&A action, so XBI frequently is helped by the virtuous cycle of one of its components being bought out for a big premium, pushing up the price of the ETF, then simply disappearing from the index — only to be replaced by another high-potential biotech.
Biotechs were bubblicious in 2015, and were due for profit-taking anyway after years of scintillating gains. XBI had ripped off 350% gains in five years before the aforementioned July peak, which is about triple the total return of the S&P 500 in that time. Even after a recovery, XBI is now 30% off that peak. With most of the froth gone, and a bit more of it being trimmed as we speak, it’s time to get back into biotechs.
The Best ETFs on the Planet: iShares Edge MSCI Min Vol EAFE ETF (EFAV)
Expenses: 0.2% (after 13-basis-point waiver)
International ETFs are the best example of how the best-performing ETFs are going to ebb and flow.
In 2014, anyone holding Indian funds like the Market Vectors India Small Cap Index ETF (NYSEARCA:SCIF) were doing cartwheels as the ascent of pro-business Narendra Modi to the prime minister seat boosted the rupee and Indian stocks alike.
But the 40% rally in SCIF was small comfort to anyone who invested in 2010 and still were sitting on 45%-50% losses. Or in 2015, you were living well if you were in Chinese ETFs like the iShares China Large-Cap ETF (NYSEARCA:FXI) or Guggenheim China Small Cap ETF (NYSEARCA:HAO) through the first few months of 2015. But if you bought on the way up, you were crying by summer.
Simply put, there are few international ETFs you can rely on if you want a chance at positive returns every single year. One of them is the iShares Edge MSCI Min Vol EAFE ETF (NYSEARCA:EFAV).
EFAV is another low-volatility product, this one centered around the MSCI EAFE Index, an ex-U.S./Canada index that includes companies in developed markets across Europe, Australasia and the Far East. EFAV uses Barra’s multi-factor risk model to weed out the “riskiest” MSCI EAFE Index stocks, resulting in a current 230-stock low-vol portfolio stuffed with stable blue chips. Stocks like multinational foods giant Nestle SA (OTCMKTS:NSRGY) and healthcare giant Roche Holding Ltd. (ADR) (OTCMKTS:RHHBY) line EFAV’s top holdings, and help throw off a decent yield of about 2.5%.
While this iShares Edge fund has trailed its basic-index brother, the iShares MSCI EAFE ETF (NYSEARCA:EFA) in the up years of 2012 and 2013, it threw off positive returns of 3.7% and 7.7% in 2014 and 2015 when EFA was in the red. It’s also ahead by about 3 percentage points so far this year. Performance-wise, EFAV probably won’t be the among the best ETFs in any given year, but it should churn out respectable capital gains and income no matter what.
The Best ETFs on the Planet: VanEck Vectors Preferred Securities ex Financials ETF (PFXF)
Type: Preferred Stock
Expenses: 0.4% (includes 7-basis-point fee waiver)
Every investor with an eye for the long term should have at least a little bit of their portfolio invested in preferred stocks. This so-called “hybrid” security melds attributes of stocks and bonds to create a high-yield dynamo that rarely budges. A quick primer on preferred stocks:
- Preferred stocks do represent equity in a company, just like common stock.
- Preferred stocks typically do not include voting rights, which is more in line with bonds.
- Preferred stocks pay a fixed (and typically high) dividend based on a fixed par rate that’s assigned when the company issues them. That’s similar to how bonds make coupon payments.
- Preferred stocks can appreciate and depreciate, but they typically are far less volatile than common stock.
Whenever anyone asks me how I started building my portfolio, I always point out that the first thing I bought when I put together my rollover IRA was the iShares U.S. Preferred Stock ETF (NYSEARCA:PFF), which I’m still currently long today. But you’ll notice the fund we’re highlighting here is the VanEck Vectors Preferred Securities ex Financials ETF (NYSEARCA:PFXF).
PFXF gets the nod by a hair, and really, it just comes down to a few points. PFXF has one of the highest yields in the space at 5.8%, it has the lowest expense ratio at 0.4%, its beta is even lower than PFF’s at 0.2, and the ETF is ex-financials — which means if the banking system does go into the toilet again, PFXF should theoretically be less at risk than most other preferred funds, which are heavy in financials. (But a fair warning: PFXF was created after the financial crisis, so we haven’t had a proper test of this theory yet.)
I’m putting my money where my mouth is, and using any new money allocated for preferred stocks to purchase PFXF.
The Best ETFs on the Planet: SPDR DoubleLine Total Return Tactical ETF (TOTL)
Type: Broad Bond
Expenses: 0.55% (with 10-basis-point fee waiver)
The SPDR DoubleLine Total Return Tactical ETF (NYSEARCA:TOTL) is one of the youngest ETFs on this list, and it also sticks out in that it’s actively managed.
The manager is no schlub, either. It’s none other than Jeffrey Gundlach, manager of the DoubleLine Total Return Bond Fund (MUTF:DBLTX), which has outperformed the Barclays U.S. Aggregate Bond Index every year since its inception in 2010.
Right now might seem like an odd time to back DoubleLine’s horse. After all, Gundlach is going through one of his worst bouts at DoubleLine, with TOTL underperforming the index and DBLTX lagging even farther behind. However, Gundlach’s struggles are mostly related to the Federal Reserve kicking the can down the road on hiking interest rates — a gamble that the risk-averse can sympathize with.
And TOTL certainly appeals to the risk-averse, providing a better risk profile than both the Barclays index and competitor Pimco Total Return Active ETF (NYSEARCA:BOND) — which TOTL surpassed in assets under management earlier this summer. DoubleLine Total Return Tactical ETF is also outperforming its actively managed rival so far this year.
Indexing is a safe way to go for broad bond exposure, but if you want to chase a little outperformance in fixed income, TOTL is the way to go.
Best ETFs on the Planet: SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB)
Type: Municipal Bond
When most people think “high-yield bonds,” they’re thinking junk — as in corporate junk. So typically, most lists of must-have ETFs include a nod toward either iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA:HYG) or SPDR Barclays High Yield Bond ETF (NYSEARCA:JNK).
But another way to go is municipal bonds. Municipal bonds are much like Treasuries, except instead of being backed by the full faith and credit of the U.S. government, they’re backed by states, cities and other municipalities. Naturally, there’s a bit more risk involved, so munis are going to yield a bit more than U.S. government bonds.
On the flip side, munis are going to yield less than corporate bonds because they’re seen as safer. And they are. According to LearnBonds’ David Waring, “municipal bonds are between 50 and 100 times less likely to default than corporate debt with the same rating.” But investors actually make up some of that yield shortcoming thanks to munis’ tax-exempt status.
So you might look at the SPDR Nuveen S&P High Yield Municipal Bond ETF’s (NYSEARCA:HYMB) 4.1% yield and shrug when you realize most junk fund yield between 5% and 7%. But the offering looks a heck of a lot better when you consider that HYMB’s taxable equivalent yield actually stands around 5.6%.
HYMB also has outperformed funds like HYG and JNK for most of its five-plus years of publicly traded life, with a speed bump in 2013 when headlines in Detroit, Chicago and elsewhere put the scare into munibond investors.
The Best ETFs on the Planet: iShares Core Aggressive Allocation ETF (AOA)
Type: Asset Allocation (Aggressive)
Expenses: 0.2% (with 14-basis-point waiver)
Let’s say you want to just build a diversified portfolio — not just stocks, but bonds, too — and you wanted to do it with the push of a button. And, heck, for the fun of it, you want that portfolio to invest a little on the riskier side of things in hopes of slightly juicier returns.
The iShares Core Aggressive Allocation ETF (NYSEARCA:AOA) was built with you in mind.
You’re probably familiar with asset allocation funds, even if you’ve never heard the term before. If you have a target-date fund in your 401k … well, you hold one type of asset allocation fund. In short, these funds provide a mix of stocks and bonds (and sometimes cash and cash equivalents such as money market funds) within a single holding.
AOA gets its particular mix by investing in a combination of 10 iShares equity and bond ETFs and a BlackRock money market fund, as well as holding cash reserves. Atop the holdings is a nearly 40% allocation to iShares’ S&P 500 ETF, the IVV, with double-digit weights to iShares Core MSCI Europe ETF (NYSEARCA:IEUR) and iShares Core MSCI Pacific ETF (NYSEARCA:IPAC).
AOA stands out against its peers for several reasons, but one of its most attractive attributes is cost. Including a fee waiver, iShares’ total expenses come to just 0.2%. That’s including acquired fund fees and expenses — essentially the costs involved in holding a bunch of ETFs that themselves charge annual expenses. What AOA charges is a mere pittance compared to a host of other funds, including high-income competitors that charge 2% and even nearly 3%.
The ETF has returned 8% annually since inception in 2008, and that’s a real-world figure that includes taxes taken out on distributions and upon selling the fund shares.
If you can keep getting that from a one-stop investment shop, you’re doing just fine.
Kyle Woodley is the Managing Editor of InvestorPlace.com. As of this writing, he was long PFF, VOO and XBI, initiating a new position in PFXF and waiting for a dip to enter SPHD and EFAV. Follow him on Twitter at @KyleWoodley.