While use of ETFs among institutional and other professional investors continues growing at a rapid rate, retail investors and advisors representing those investors remain core constituencies among ETF users.
As has been widely noted, retail investors are often drawn to ETFs due to the asset class’s low fees. The best ETFs are not always the cheapest in terms of sheer performance, but for investors with long time horizons looking to build their own portfolios, many of the best ETFs to consider are those funds that can be considered cheap. Data confirm that low fees make a difference for long-term investors.
“Imagine you have $100,000 invested. If the account earned 6% a year for the next 25 years and had no costs or fees, you’d end up with about $430,000,” according to Vanguard. “If, on the other hand, you paid 2% a year in costs, after 25 years you’d only have about $260,000.”
Of course, there are a variety of tactical and thematic funds for investors to consider, many with compelling alpha-seeking capabilities, but for investors looking for set-it-and-forget core type investments, the following are some of the best ETFs to evaluate.
JPMorgan BetaBuilders U.S. Equity ETF (BBUS)
Expense ratio: 0.02% per year, or $2 on a $10,000 investment.
Prior to the recent debuts of a pair of no-fee ETFs, the JPMorgan BetaBuilders U.S. Equity ETF (CBOE:BBUS) briefly held the title of cheapest ETF in the U.S. Naysayers will note that entering BBUS in the best ETFs conversation is tricky at this point because the fund is barely more than a month old, but age with ETFs is just a number.
For investors looking to check the boxes of low fees and broad domestic equity market exposure, BBUS is one of the best ETFs, regardless of its rookie status. Home to 622 stocks, BBUS provides exposure to 85% of the U.S. equity market. In just six weeks on the market, BBUS has amassed $31.66 million in assets, marking one of the more impressive starts among 2019’s crop of new ETFs.
With a larger roster than the S&P 500, BBUS could prove to be one of the best ETFs to replace S&P 500 tracking funds and, at least for the time being, the new JPMorgan ETF is cheap than any of the S&P 500 index funds available to retail investors. Still, long-term investors should expect BBUS to perform mostly inline with other broad market funds over time. The advantage will come from this fund’s lower fee.
WisdomTree U.S. MidCap Dividend Fund (DON)
Expense ratio: 0.38%
Yes, there are definitely mid-cap funds with lower fees than the 0.38% charged by the WisdomTree U.S. MidCap Dividend Fund (NYSEARCA:DON), but few mid-cap funds can match DON’s status as one of the best ETFs for this market segment.
Many investors that are building set-it-and-forget-it portfolio focus too heavily on domestic large caps, usually at the expense of mid-cap stocks. Historical data confirm that is a bad move because mid caps display better long-term returns than large caps and, in many cases, mid caps also beat small-cap stocks and do so with less volatility.
DON is one of the best ETFs or mutual funds in the mid-cap space because since its inception nearly 13 years ago, the WisdomTree fund has beaten more than 90% of competing strategies, often by healthy margins.
DON is also one of the best ETFs for long-term investors because the fund pays a monthly dividend and dividend-paying stocks are usually less volatile than their non-dividend counterparts.
iShares Edge MSCI Min Vol USA ETF (USMV)
Expense ratio: 0.15%
Low volatility funds are among the best ETFs for investors to consider when building portfolios for the long-term and the iShares Edge MSCI Min Vol USA ETF (CBOE:USMV) is one of the leaders of that pack. Before embracing low volatility ETFs, investors should note that the primary objective of these funds is to provide less downside capture when stocks decline, not capture all of the market’s upside when stocks rally.
“Minimum Volatility strategies aim to create a holistic portfolio with lower risk than the market,” said BlackRock in a recent note. “The factor has historically delivered lower downside capture, but lower upside potential as well, making it more appropriate for investors seeking to reduce risk while still maintaining potential for returns similar to the broader market.”
From January 2015 through February 2019, minimum volatility’s upside capture was just over 82%, but its downside capture for less than 59%, according to BlackRock data.
The $25 billion USMV holds 213 stocks, a combined 30.76% of which hail from the technology and healthcare sectors.
Schwab US Small-Cap ETF (SCHA)
Expense ratio: 0.04%
While small-cap stocks are more volatile than large-cap competitors, small caps are integral ingredients in long-term portfolios. Consider this: since the start of the current bull market in March 2009, the S&P SmallCap 600 Index is up nearly 471% compared to 400% for the large-cap S&P 500.
For cost-conscious investors, the Schwab US Small-Cap ETF (NYSEARCA:SCHA) is one of the best ETFs to consider in the small-cap space. The $7.9 billion SCHA tracks the Dow Jones U.S. Small-Cap Total Stock Market Index and holds nearly 1,740 stocks, making it one of the best ETFs among small-cap funds in terms of roster size and diversity.
SCHA has another perk that makes it one of the best ETFs for frugal investors: Schwab clients can trade the fund commission-free. This small-cap ETF allocates over half its combined weight to the financial services, technology and industrial sectors.
Vanguard Total Bond Market ETF (BND)
Expense ratio: 0.05%
Portfolio construction for the long term needs to include diversification, meaning bond funds are among the best ETFs investors to consider. The Vanguard Total Bond Market ETF (NASDAQ:BND) is one of the best ETFs for investors for size and cost synergies in a bond fund because BND is one of the largest and cheapest bond ETFs in the U.S.
BND is an aggregate bond fund, meaning it is one of the best ETFs for investors looking for exposure to a deep bench of fixed income assets. The fund holds 8,463 bonds with an average duration of six years and an average effective maturity of 8.20 years. The bulk of BND’s holdings are U.S. government and agency debt, meaning credit risk is not an issue with this bond fund.
With a yield of 2.77% and minimal credit risk, BND can be one of the best ETFs for conservative investors looking for reliable income.
Todd Shriber does not own any of the aforementioned securities.