With 2019 winding down, it’s safe to say this has been another exciting year for exchange-traded funds (ETFs) and ETF investors in multiple respects. As of the end of October, U.S.-listed exchange traded products, including ETFs, had $4.15 trillion in combined assets under management, up from $4.05 trillion at the end of September, according to ETGI data.
Moreover, this has been another banner year for investors that love cheap ETFs, because that universe continues growing. As of the end of 2018, the asset-weighted average fee for passive index funds, including ETFs, fell to 0.15% compared to 0.67% on actively managed mutual funds, notes Morningstar.
There’s a reasonably good chance that when the research firm issues its annual fund fee report next year, that 0.15% asset-weighted fee on passive index funds will be even lower because a raft of cheap ETFs have debuted this year and some already inexpensive funds have become even less pricey. For example, Vanguard, always among the favored issuers for users of cheap ETFs, recently pared fees on 15 of its funds.
For bargain hunters, here are some of the best cheap ETFs to consider for the rest of 2019 and into 2020.
Cheap ETFs: Vanguard Russell 3000 Index Fund ETF Shares (VTHR)
Expense Ratio: 0.15%, or $15 annually per $10,000 invested
Among Vanguard ETFs, the Vanguard Russell 3000 Index Fund ETF Shares (NASDAQ:VTHR) is one that doesn’t get a lot of attention, but is part of the aforementioned group of funds that Vanguard recently pared expenses on. Additionally, VTHR is a fine idea for cost-conscious investors looking for broad market exposure.
As its name implies, VTHR tracks the Russell 3000 Index, one of the broadest gauges of domestic stocks. In fact, that index represents about 98% of total U.S. equity market capitalization. The fund is diverse with limited single-stock risk as its top 10 holdings combine for just over 19% of the portfolio.
Technology and financial services stocks combine for 43% of this cheap ETF’s weight. While the Russell 3000 is a different beast than the S&P 500, investors opting for VTHR should expect similar return and volatility profiles to the S&P 500 over long holding periods.
SPDR S&P 500 Value ETF (SPYV)
Expense Ratio: 0.04%
Recently, there has been increasing chatter about a growth to value rotation. That doesn’t mean growth stocks are poised for big declines; upside is the path of least resistance there. However, it could finally be time for value stocks to show some legitimate strength against growth equivalents.
Investors should prepare for that trend with cheap ETFs, such as the SPDR S&P 500 Value ETF (NYSEARCA:SPYV), one of the least expensive value funds on the market today. The $4.48 billion SPYV tracks the S&P 500 Value Index and there are signs that investors are embracing the notion of a value resurgence as highlighted by SPYV’s year-to-date inflows of $1.64 billion.
With factor-based ETFs, regardless of the underlying factor, investors should examine what type of sector-level bets they’re making. Typically, with value funds, financial services is the largest sector weight and that is true of SPYV as that sector accounts for almost 22% of the fund’s weight.
iShares Core MSCI Europe ETF (IEUR)
Expense Ratio: 0.09%
Speaking of cheap ETFs that offer up value in the stricter investment sense, some Europe funds fit that bill and the iShares Core MSCI Europe ETF (NYSEARCA:IEUR) is one member of that group. European stocks are often dubbed with a laggard label and deservedly so. But IEUR is up nearly 20% year to date and it trades at valuations that are more reasonable than what investors find in the U.S.
This cheap ETF holds nearly 1,000 stocks and follows the MSCI Europe Investable Market Index, meaning it’s a diversified fund, not a dedicated Eurozone play. Usually, such funds feature large weights to the U.K., meaning there is some Brexit risk.
Indeed, IEUR allocates 26.44% of its weight to U.K. equities, but even with that, this cheap ETF is up almost 3% over the past month and appears to be gaining steam. Plus, its 2.90% dividend yield is superior to what investors get on broad U.S. equity benchmarks. Also, the standard deviation of 12.49% implies an acceptable level of risk, even for highly conservative investors.
Fidelity MSCI Information Technology Index ETF (FTEC)
Expense Ratio: 0.08%
Vanguard gets a lot of attention for offering plenty of cheap ETFs, but Fidelity has earned a place in that conversation, too.
In fact, Fidelity, not Vanguard, offers the cheapest sector ETFs, including the Fidelity MSCI Information Technology Index ETF (NYSEARCA:FTEC). FTEC, one of Fidelity’s largest ETFs by assets, follows the Fidelity MSCI Information Technology Index ETF.
This cheap ETF makes a lot of sense for investors that are mulling allocations to Apple or Microsoft (NASDAQ:MSFT) because FTEC doesn’t force investors to pick between the two tech titans. Rather, the fund allocates a third of its combined weight to those two scorching hot names. With 5G coming (Apple) and cloud computing booming (Microsoft), there are plenty of reasons to embrace FTEC now and for 2020.
“I think the interesting thing is that most people look at Apple’s performance year to date and say, oh my God the stock’s run so much, it’s up 60% year to date, there’s material out performance behind us, so there’s really not much room to run,” said Wamsi Mohan, senior equity analyst at Bank of America Merrill Lynch on CNBC. “Heading into the iPhone 11 launch you actually got an 8% relative decline to the S&P since the launch of the last iPhone to the release of the iPhone 11. So, to put this in context, in past cycles where you’ve had that sort of under-performance, you’ve actually followed by material out-performance, which is what we think is the case heading into the 5G launch.”
iShares Core S&P U.S. Growth ETF (IUSG)
Expense Ratio: 0.04%
As noted earlier, investors don’t have to pick just one of growth or value. And while value is due for a comeback, that doesn’t put nails in the growth coffin. The iShares Core S&P U.S. Growth ETF (NASDAQ:IUSG) is a cheap ETF offering a basket of well-known growth stocks and one that has been on a torrid pace this year, returning north of 24%.
This cheap ETF tracks the S&P 900 Growth Index and holds 541 stocks. As is the case with value funds, investors should conduct sector-level examinations of growth ETFs to know what they’re buying. Usually, a growth fund includes hefty technology and consumer cyclical allocations and that’s true of IUSG, which allocates a combined 39% of its weight to those sectors.
The uniqueness of the current business cycle bodes well for growth stocks, indicating this cheap ETF is worthy of investors’ consideration now and into 2020.
“What’s particularly exciting about growth investing today is that, for the first time, we’ve been in an economic environment without a traditional business cycle,” said BlackRock in a recent note. “This means investors will seek out companies that prosper organically on their own, almost independent of the economic cycle. I think this will be a good sign for growth stocks overall, not only today but for years to come.”
Vanguard Mid-Cap ETF (VO)
Expense Ratio: 0.04%
It’s never too early make new year’s resolutions. One that investors should consider and ensure that they stick to is owning mid-cap stocks or fund if they don’t already. The Vanguard Mid-Cap ETF (NYSEARCA:VO) is a broad fund and one of the cheapest ETFs in the mid-cap arena. In fact, no mid-cap ETF is cheaper than VO, though one ties with the Vanguard fund with an expense ratio of 0.04%.
Beyond costs, this cheap ETF provides investors with an avenue to an equity market segment that typically outperforms large caps by wide margins. Not only that, but mid-cap stocks historically offer better risk-adjusted returns than their small-cap rivals. But for investors that like a good deal, this cheap ETF is a great option.
“Vanguard charges an ultra-low 0.04% fee for this fund. This cost advantage has translated into strong category-relative performance over the long term,” Morningstar said. “Over the trailing 10 years through June 2019, the fund has outperformed the category average by 277 basis points annualized while assuming similar risk. Overall, this fund should continue to enjoy a durable long-term edge over many of its competitors because of the low expense ratio.”
WisdomTree U.S. LargeCap Fund (EPS)
Expense Ratio: 0.08%
So you want to own domestic large caps but desire a methodology that isn’t market-cap weighting and don’t want to pay a high fee for the privilege. The WisdomTree U.S. LargeCap Fund (NYSEARCA:EPS) delivers as it’s one of the cheapest ETFs in the smart beta arena.
EPS, which has a track record spanning more than 12 years, targets the WisdomTree U.S. LargeCap Index. That benchmark “is earnings-weighted in December of each year to reflect the proportionate share of the aggregate earnings each component company has generated. Companies with greater earnings generally have larger weights in the index,” according to WisdomTree.
If that’s too much financial patter, the easy way of looking at EPS is that it lives up to its ticker by putting added emphasis on companies that are profitable and growing earnings. The focus on profits doesn’t create a boring portfolio. Quite the contrary, as EPS devotes a third of its combined weight to technology and communication services stocks.
EPS indicates the fund can be a winner when stocks see expanding multiples and markets are prizing higher beta sectors.
“By earnings-weighting our strategy, the portfolio takes on some unique sector tilts compared to a market cap-weighted approach,” according to WisdomTree research. “The portfolio has tended to be over-weight more cyclical consumer driven sectors and has had its best performance when broad market growth is robust and valuations multiples are expanding.”
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.