There are nearly 2,200 exchange-traded products (ETPs) trading in the U.S. and that list expands on an almost daily basis. So depending on one’s point of view, it is either really easy or extremely difficult to boil the expansive exchange-traded funds (ETFs) down to 10 funds suitable to be held over lengthy time frames.
To be sure, not all of the funds trading in the U.S. merit consideration for a compilation of the only 10 ETFs an investors will ever need. Some are best used as short-term trades or for tactical exposure. Additionally, while ETFs have made scores of previously hard to reach asset classes more accessible, not all of those asset classes need to be cornerstones of portfolios.
Of course, fees are part of the equation. Not surprisingly, investors are drawn to inexpensive index funds, but there are also some ETFs with higher fees that have delivered strong long-term total returns.
Here are 10 ETFs suitable for a wide array of investor that can be used as key building blocks in a well-diversified portfolio.
Only 10 ETFs you Need: iShares Core S&P Total U.S. Stock Market ETF (ITOT)
Expense ratio: 0.03%
There are dozens of ETFs that can be used as core holdings, many of which offer broad-based exposure to U.S. stocks and many of which carry modest fees. The iShares Core S&P Total U.S. Stock Market ETF (NYSEARCA:ITOT) checks all of those boxes.
The $13.2 billion ITOT tracks the S&P Total Market Index and holds nearly $3,500 stocks. With that modest annual fee of just 0.03%, this iShares ETF is one of the least expensive equity ETFs on the market.
“Low turnover is a key advantage of the fund’s market-cap-weighted approach because changes in the prices of its holdings mirror changes to their weightings in the market,” said Morningstar. “Compared with large-cap index-tracking funds, this fund benefits more from weighting by market cap because it owns stocks of all sizes and doesn’t have to sell or buy names as they cross arbitrary market-cap size segments.”
Only 10 ETFs you Need: PowerShares S&P 500 Equal Weight Portfolio (RSP)
Expense ratio: 0.2%
The PowerShares S&P 500 Equal Weight Portfolio (NYSEARCA:RSP) just celebrated its 15th birthday, giving it one of the longest track records among equal-weight ETFs. Arguably, RSP is the fund that brought the advantages of the equal-weight methodology to the mainstream ETF lexicon.
While the traditional S&P 500 is cap-weighted, meaning the likes of Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT) are among the largest components, equal-weight indexes assign more importance to smaller stocks. So while RSP is not a dedicated small-cap ETF, some of its long-term outperformance potential is derived from a lower average market capitalization relative to the cap-weighted S&P 500.
Since inception, RSP has outperformed the traditional S&P 500 by more than 3,700 basis points while being only slightly more volatile.
Only 10 ETFs you Need: WisdomTree U.S. SmallCap Dividend Fund (DES)
Expense ratio: 0.38%
Small-caps are not usually associated with being income ideas, but DES helps change that notion. The ETF’s underlying index has a dividend yield of 3.9%. The widely followed S&P SmallCap 600 Index yields a paltry-by-comparison 1.2%.
Over a long timeframe, DES has been less volatile than traditional small-cap benchmarks and the fund delivers its dividend on a monthly basis.
Only 10 ETFs you Need: Emerging Markets Internet & Ecommerce ETF (EMQQ)
Expense ratio: 0.86%
The Emerging Markets Internet & Ecommerce ETF (NYSEARCA:EMQQ) could make for a nice addition to a younger investor’s long-term portfolio. After all, international stocks, including emerging markets equities, should be part of such a portfolio.
In recent years, traditional emerging-markets equity indexes have increased their exposure to technology stocks, but EMQQ offers a more complete, focused play on markets where internet growth is booming and expected to continue doing so for many, many years.
“To be included, the companies must derive their profits from Ecommerce or Internet activities and include search engines, online retail, social networking, online video, e-payments, online gaming and online travel,” according to EMQQ’s issuer.
Over the past three years, EMQQ is up nearly 46%, or better than triple the performance of the MSCI Emerging Markets Index over that period.
Only 10 ETFs you Need: VanEck Vectors High-Yield Municipal Index ETF (HYD)
Expense ratio: 0.35%
Bonds should be part of a well-balanced portfolio and there are tax advantages associated with municipal bonds that increase the allure of this fixed-income segment. Generally speaking, municipal bonds are not “exciting,” but the VanEck Vectors High-Yield Municipal Index ETF (NYSEARCA:HYD) adds some spice to a usually staid market segment.
HYD yields over 4%, which is well above what investors find on investment-grade muni funds. The trade off is over two-thirds of HYD’s lineup being rated BBB, BB or B. Still, just over 29% of HYD’s portfolio carries investment-grade ratings.
Only 10 ETFs you Need: iShares Gold Trust (IAU)
Expense ratio: 0.25%
With the dollar slack dating back to early 2017 and U.S. inflation trending higher, the current environment has been favorable to gold and bullion-backed ETFs even as the Federal Reserve is raising interest rates. The iShares Gold Trust(ETF) (NYSEARCA:IAU) is up more than 2% over the past 12 months.
Gold is expected to remain in a range of $1,300 to $1,400 per ounce this year, but still low interest rates in ex-U.S. developed markets and declining rates in developing economies could boost investment demand for the yellow metal. Gold also has some compelling long-term catalysts.
For example, gold prices could rise as mining activity declines. Some industry observers believe most of the world’s cheap, easy-to-access gold has already been mined, meaning supply could start dwindling in the years ahead.
Only 10 ETFs you Need: Vanguard Mega-Cap Growth ETF (MGK)
Expense ratio: 0.07%
Historical data points indicate that, over the long-term, the value factor outperforms its growth rival. Still, there are times when growth stocks shine and for many investors, larger growth names are most appropriate. Enter the Vanguard Mega-Cap Growth ETF (NYSEARCA:MGK), which eases the burden of stock picking among growth stocks.
MGK charges just 0.07% per year, making it 94% cheaper than the average fees of its peers of competing strategies. Home to 131 stocks, MGK is similar to many growth funds in that it is significantly overweight the technology and consumer discretionary sectors. Those sectors combine for 52% of MGK’s weight.
Only 10 ETFs you Need: Vanguard Real Estate ETF (VNQ)
Expense ratio: 0.12%
As is the case with bonds and commodities, real estate can offer investors exposure to an asset class that is not always highly correlated to equities. Plus, real estate investment trusts (REITs) often feature above-average yields. For its part, the Vanguard Real Estate ETF (NYSEARCA:VNQ), the largest sector ETF in the U.S., has a trailing 12-month dividend yield of 4.8%, or nearly 300 basis points above the S&P 500’s dividend yield.
REITs are viewed as a rate-sensitive asset class, explaining some of VNQ’s lethargy over the past year. However, historical data indicate that as tightening cycles move along, REITs endure and often thrive.
VNQ allocates 23.4% of its weight to specialized REITs and nearly a third of its combined weight to retail and residential REITs.
Only 10 ETFs you Need: SPDR S&P Dividend ETF (SDY)
Expense ratio: 0.35%
Dividends are an essential part of any portfolio and the SPDR S&P Dividend ETF (NYSEARCA:SDY) offers dividend investors a lot to like. The fund is yield-weighted, but does not emphasize yield as part of its selection criteria.
Rather, SDY tracks the S&P High Yield Dividend Aristocrats Index, which requires member firms to have boosted payouts for at least 20 consecutive years. Due to that dividend increase screen, “stocks included in the Index have both capital growth and dividend income characteristics, as opposed to stocks that are pure yield,” according to State Street.
SDY’s dividend yield is 2.4%, which implies ample room for payout growth. The financial services and consumer staples sectors combine for 31% of SDY’s roster while industrials and utilities combine for 28%. Many of SDY’s 111 components have dividend increase streaks in excess of the 20 years required for entry into the fund.
Only 10 ETFs you Need: iShares Core MSCI EAFE ETF (IEFA)
Expense ratio: 0.08%
Again, international stocks should be part of most portfolios. The iShares Core MSCI EAFE ETF (BATS:IEFA) is one of the fastest-growing developed markets ETFs around. In just five and a half years, IEFA has become a $57.51 billion behemoth. It helps to be one of last year’s top asset-gathering ETFs, a status IEFA is retaining to start 2018.
These could be potentially halcyon days for IEFA rival funds. U.S. stocks look pricey, but other developed markets, not so much. IEFA’s price-to-earnings ratio of 15.3 implies significant discounts to major U.S. large-cap benchmarks.
As is the case with MSCI EAFE strategies, IEFA is heavily allocated to Japan and the U.K. as those countries combine for over 42% of the fund’s weight. Eurozone economies combine for about 30% of the fund’s weight. Investors looking for a broad basket of stocks (2,520 to be precise) with a low fee for their international exposure should consider IEFA.
As of this writing, Todd Shriber owned shares of IAU and VNQ.