Looking for the best ETFs? That’s something of a chore, considering there are well more than 1,900 exchange-traded funds on the market. Buy-and-hold funds or trading vehicles. Stocks, bonds, commodities or “multi-asset” ETFs. Leveraged funds, inverse funds.
While investors will buy a few holdings for protection, the point of most ETF investments is the same no matter who you are: Beat the market.
The best ETFs, then, are those funds that not only can beat the S&P 500 in the long-term, but can also do so with a level of risk that you’re comfortable with. Risk is one of those things that every investor is aware of, and yet, most investors don’t pay enough attention to when it comes to actually deciding what stocks, funds and other assets to buy.
This list of best ETFs is really a place for you to begin your research. I’ve taken seven choices that are beating their benchmarks and seem to have a solid approach, but you’ll have to filter for risk, based on your own risk profile.
The Best ETFs for Market-Beating Returns: Guggenheim S&P 500 Equal Weight ETF (RSP)
Guggenheim S&P 500 Equal Weight ETF (NYSEARCA:RSP) is one of the best ETFs representing the overall market. For each of the past 10 years, it has come in a full 200 basis points or more over the actual index itself.
RSP’s equal-weight strategy is one that I personally prefer over market-cap-weighted. With market-cap weight leading the way, the index is biased toward the larger companies. For instance, in the S&P 500, companies like Apple Inc. (NASDAQ:AAPL) and Exxon Mobil Corporation (NYSE:XOM) are among the top holdings because of their sheer size. It’s a lot easier for a momentum stock or a crowd favorite to take control of the index.
With equal-weight, there’s less volatility and the smaller stocks can contribute more to returns if they do well. In the RSP, companies like genetic sequencing firm Illumina, Inc. (NASDAQ:ILMN) and Arconic Inc (NYSE:ARNC) — the “growth” part of the former Alcoa Corp (NYSE:AA) business — have just as much push and pull on the fund as the big boys.
The Best ETFs for Market-Beating Returns: ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
ProShares S&P 500 Dividend Aristocrats ETF (BATS:NOBL) is probably one of the best ETFs out there as far as taking a dividend approach.
We all know that dividend aristocrats are a great, safe, unexciting way to make modest returns. Companies that have raised their dividends every year for at least 25 years shows that they are very stable footing, with tons of free cash flow. These are companies like Clorox Co (NYSE:CLX) and Sherwin-Williams Co (NYSE:SHW) that put people to sleep, but slowly and consistently grow investor wealth.
ProShares’ site points out that since inception in May 2005, the S&P Dividend Aristocrats Index has outperformed the broader S&P 500 with lower volatility. That’s very solid.
Just don’t expect big yield. NOBL only yields 1.8%, but it’s offset by a fairly low expense ratio of 0.35%.
The Best ETFs for Market-Beating Returns: PowerShares DWA SmallCap Momentum ETF (DWAS)
PowerShares DWA SmallCap Momentum ETF (NASDAQ:DWAS) is a smart-beta strategy, meaning it takes an existing index and splices and dices it for a more specific purpose (one naturally aimed at beating the market).
DWAS takes about 200 holdings — such as Exelixis, Inc. (NASDAQ:EXEL) and Clayton Williams Energy, Inc. (NYSE:CWEI) — from a universe of small-cap stocks, and invests those that are exhibiting strong relative strength and momentum compared to their peers. The fund has returned nearly 27% in the past year.
I prefer small-cap stocks in general because they have a better long-term return than large-cap stocks. The reason is that small caps have further to run thanks to the relative ease of growth comparisons than companies that are already established.
DWAS is a solid choice for those who like momentum stocks but want to use that momentum wisely.
The Best ETFs for Market-Beating Returns: iShares Morningstar Mid-Cap Value ETF (JKI)
We can’t leave out our mid-cap friends from our list of best ETFs.
The iShares Morningstar Mid-Cap Value ETF (NASDAQ:JKI) has a long track record — since 2004 — that speaks well to its execution. With 173 stocks, it focuses on the value plays in the mid-cap sector.
As it happens, value (like small caps) outperforms growth in the long run because these stocks have further to run to catch up to their intrinsic value.
JKI is a financial-heavy fund that also has strong weights in technology, utilities and consumer discretionary names. And despite the mid-cap moniker, some of its holdings do creep into the large-cap threshold, including M&T Bank Corporation (NYSE:MTB) and Micron Technology Inc (NASDAQ:MU).
This iShares collection of mid-cap stocks returned 31.4% over the past year, handily outpacing the broader mid-cap index that returned 23.8%, and the S&P 500, which sits near 21%.
The Best ETFs for Market-Beating Returns: iShares MSCI ACWI ETF (ACWI)
iShares MSCI ACWI ETF (NASDAQ:ACWI) is a good choice for those who want international exposure, which is something I recommend.
I don’t care for non-diversified funds in general, but that’s particularly true for international stocks. Different countries operate in different ways, and we just don’t know what kind of risks they carry because we aren’t there.
The ACWI isn’t a completely international stock fund, and instead is “global,” which means it includes U.S. stocks. Here, American holdings represent a little more than half the efund, with Japan (7.7%), the U.K. (5.2%) and China (3.3%) taking up the biggest international weightings.
The ACWI has a long term return that is slightly better than its category, with a five-year annualized return of 8.93% vs. the category average of 8.77%. The one-year returns are actually better, at 17.8% vs. 15.14%.
The Best ETFs for Market-Beating Returns: PowerShares Buyback Achievers Portfolio (PKW)
Another alternative strategy is the PowerShares Buyback Achievers Portfolio (NYSE:PKW), which comprises of an index in which its companies have reduced share counts by at least 5% over the preceding 12 months. The managers reconstitute the entire index annually and also rebalance quarterly.
About two-thirds of the stocks are large-caps, which is no big surprise since buybacks are usually the stuff of companies with the cash on hand to buy back the stock. Nor is the ETF insanely priced, with the average P/E ratio of the stocks about 18.
PKW has significantly outperformed the S&P 500 index. Since inception in 2006, it has returned 134% against the S&P 500 returns of 106%.
The Best ETFs for Market-Beating Returns: PowerShares S&P 500 High Beta Portfolio ETF (SPHB)
Finally, we have the PowerShares S&P 500 High Beta Portfolio ETF (NYSEARCA:SPHB).
This is a bit risky for my personal taste, but the fund invests in the 100 stocks in the S&P that have shown the highest sensitivity (beta) to market movements over the past 12 months.
Normally, I prefer to find low-beta stocks and ETFs that provide commensurate returns. Still, I know some investors like a little more action, and while there can be significant downside to an ETF like this, SPHB has a 46% one-year return vs. the S&P’s return of about 21%.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.