While adoption of exchange-traded funds (ETFs) continues to increase among advisors, institutional investors and other professionals, this asset class is favorable for novice investors as well. In fact, strong arguments can be made that ETFs are ideal for novice investors.
Many of the best ETFs feature low fees, efficient, broad exposure to equities and bonds and some of the best ETFs also offer cost-effective, diversified access to international equities. ETFs also help novice investors avoid the need to pick individual stocks, an endeavor many professional investors have not mastered.
“[ETFs] take the benefits of mutual fund investing to the next level. ETFs can offer lower operating costs than traditional open-end funds, flexible trading, greater transparency, and better tax efficiency in taxable accounts,” according to Fidelity. “There are drawbacks, however, including trading costs and learning complexities of the product. Most informed financial experts agree that the pluses of ETFs overshadow the minuses by a sizable margin.”
For novice investors and rookie portfolio builders, here are some of the best ETFs to consider.
Schwab US Broad Market ETF (SCHB)
Expense Ratio: 0.03%, or $3 annually per $10,000 invested
Some inexpensive ETFs can be disappointments, but, then again, low fees are often hallmarks of some of the best ETFs. For novice investors, the Schwab US Broad Market ETF (NYSEARCA:SCHB) resides in the latter category. SCHB is one of a handful of ETFs that have taken expense ratios down to 0.03% per year, meaning return erosion via fees is minimal with this product.
SCHB tracks the Dow Jones U.S. Broad Stock Market Index and the fund is home to nearly 2,500 of the largest domestic companies as weighted by market value. For novice investors, SCHB is also one of the best ETFs because its investment objective is straight forward and easy to understand. Overall and over the past three years and five years, SCHB has four-star ratings from Morningstar.
SCHB allocates about half its weight to technology, healthcare and financial services stocks. Over the long-term, investors should expect returns with SCHB that do not deviate too much from the S&P 500.
Vanguard Total International Stock ETF (VXUS)
Expense Ratio: 0.11%
Novice investors should not ignore international equities and the Vanguard Total International Stock ETF (NASDAQ:VXUS) is one of the best ETFs for tapping markets outside the U.S. Plus, VXUS is cheaper than 89% of competing strategies, according to issuer data.
VXUS is one of the best ETFs for new investors for a couple of other reasons. First, this Vanguard fund features a massive amount of stocks, almost 6,400. Second, VXUS combines developed and emerging markets exposure, tilting toward the former. On that note, about 25 countries are represented in this fund, meaning investors are not making concentrated geographic bets.
“The fund’s total and risk-adjusted returns were similar to the category average between its launch in January 2011 and November 2018,” said Morningstar in a recent note. “It remained fully invested, while its better-performing competitors were more defensive, giving them an advantage during this period of lackluster market performance.”
WisdomTree U.S. MidCap Dividend Fund (DON)
Expense Ratio: 0.38%
Novice investors should not make the same mistake that many of their season counterparts make and that is avoiding mid-cap stocks. Over long holdings periods, mid caps have a rich tradition of outpacing large caps, while often offering better risk-adjusted returns than small-cap stocks.
Investors can access mid caps with the benefit of dividends via the WisdomTree U.S. MidCap Dividend Fund (NYSEARCA:DON), which is the dominant name among mid-cap dividend ETFs. DON’s methodology is slightly more complex than more prosaic ETFs, such as SCHB and VXUS, but new investors should not be intimidated. At its core, DON looks for mid-cap stocks with sound fundamentals and the ability to continue growing dividends, which gives this fund a value tilt.
What makes DON one of the best ETFs is that it consistently proves its mettle. Since coming to market 12 years ago, DON has been one of the best ETFs in the mid-cap space as well as offering investors consistent out-performance of many higher fee, actively managed rivals.
iShares Core Growth Allocation ETF (AOR)
Expense Ratio: 0.25%
A wise idea for some inexperienced investors is to forego attempting to pick among individual asset classes and let a single fund do that legwork. Some of the best ETFs use what is known as the ETF of ETFs structure, meaning the fund’s underlying holdings are other ETFs. The iShares Core Growth Allocation ETF (NYSEARCA:AOR) is one of those products.
What makes AOR one of the best ETFs for new investors is its breadth across multiple asset classes. While AOR holds just seven other iShares ETFs, the fund merits consideration for including multiple corners of the bond market as well as mid- and small-cap ETFs and international equity funds.
Vanguard Dividend Appreciation ETF (VIG)
Expense Ratio: 0.08%
As was noted earlier with DON, dividend strategies should be embraced by novice investors. One of the best ETFs for exposure to large-cap dividend payers is the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG). VIG is also one of the least expensive dividend ETFs. Its annual fee of just 0.08% makes it cheaper than 92% of competing funds.
VIG is also one of the best ETFs because its strategy is easy for any investor to understand. This Vanguard fund tracks the Nasdaq Dividend Appreciation Index, which requires member firms to have dividend increase streaks of at least a decade. That makes VIG one of the best ETFs for investors looking for a steady diet of reliable payout growth.
VIG holds 182 stocks, over half of which hail from the industrial and consumer staples sectors. Healthcare and consumer discretionary names combine for almost a quarter of the fund’s weight.
Invesco QQQ (QQQ)
Expense Ratio: 0.20%
The Invesco QQQ (NASDAQ:QQQ), also known as the Nasdaq 100 tracking ETF, is one of the best ETFs for rookie investors with higher levels of risk tolerance and those seeking significant exposure to the technology sector.
With the recent debut of the communication services sector, QQQ’s technology weight has been reduced to 43% with a 23% weight to communication services names. Either way, QQQ is one of the best ETFs for investors looking for exposure to large-cap technology and internet stocks. The rub there is when growth stocks, such as the FAANG quintet, struggle, QQQ does, too. The once high-flying QQQ is currently saddled with a fourth-quarter loss of almost 20%.
QQQ holds 102 stocks, but this is not necessarily one of the best ETFs for investors looking to avoid concentration risk as Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) combine for nearly a third of QQQ’s roster.
iShares Edge MSCI USA Value Factor ETF (VLUE)
Expense Ratio: 0.15%
Value strategies have struggled over the course of the current bull market in U.S. stocks, but historically, value stocks have been sturdy, making the related funds some of the best ETFs for novice investors to consider.
The iShares Edge MSCI USA Value Factor ETF (CBOE:VLUE) is one of the best ETFs in the value lot. VLUE, which is more than five and a half years old, follows the MSCI USA Enhanced Value Index. The fund is a value play with a price-to-earnings ratio of 11.84, which is well below the comparable ratio on the S&P 500 despite the broader market’s recent slump.
What makes VLUE one of the best ETFs in the value space is that its sector allocations are not typical among value strategies. Typically, value funds are heavily allocated to energy and financial services stocks, two of this year’s worst-performing sectors. Those sectors combine for 18.47% of VLUE’s weight, but this fund devotes 36% of its combined weight to technology and healthcare stocks.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.