This has been another banner year for exchange-traded funds (ETFs). On a global basis, the industry recently topped $6 trillion in combined assets under management with over $4 trillion of that sum residing here in the U.S.
Another interesting element of 2019’s ETF ebullience is that fixed income ETFs are on pace to add more assets than their equity-based counterparts for the first time since the global financial crisis. As of Dec. 10, five of the 10 best ETFs in terms of assets added this year are bond funds.
The other prominent theme has been investors’ ongoing affinity for inexpensive ETFs. While not all of the best ETFs are extremely cheap, there are plenty of strong funds out there with low expense ratios and those fees are falling. Additionally, basically every brokerage firm of note eliminated commissions on ETFs this year, so the asset class is becoming even more cost-effective to embrace.
With that in mind, let’s have a look at seven of the best ETFs in terms of adding capital this year. One note: not all of the ETFs mentioned here will be among the top 10 for assets added. Some will be impressive asset gainers on a percentage basis.
Vanguard Total International Bond ETF (BNDX)
Expense Ratio: 0.09% per year, or $9 on a $10,000 investment.
Three interest rate cuts by this year by the Federal Reserve are certainly compelling investors to embrace domestic fixed income strategies, but Vanguard Total International Bond ETF (NASDAQ:BNDX) is the best ETF when it comes to fixed income flows. As of Dec. 10, this Vanguard fund has seen 2019 inflows of $10.41 billion, a total surpassed by just three other ETFs.
BNDX, which is up 7.10% this year, can be a complement to domestic aggregate bond funds, providing investors with some international diversity. Timing has contributed to making BNDX one of the best ETFs this year because the fund targets the Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged), positioning it to benefit from dollar strength.
The fund features a massive lineup of more than 6,100 bonds and an average duration of 8.3 years, putting it at the higher end of intermediate-term territory. Credit risk is also minimal as the bulk of BNDX’s holdings carry ratings that are at the higher end of investment-grade territory. Japan and France combine for 31.6% of the fund’s geographic exposure.
iShares Core MSCI EAFE ETF (IEFA)
Expense Ratio: 0.07%
Keeping with the theme of some of the best ETFs for international exposure, on the equity side, the iShares Core MSCI EAFE ETF (CBOE:IEFA) has to be part of the conversation. Investors have added $10.20 billion to this product year-to-date, a figure surpassed by just four other funds.
After ranking among the best ETFs for adding assets for several years in a row, IEFA has $71.75 billion in assets under management, making it significantly larger than the iShares MSCI EAFE ETF (NYSEARCA:EFA), the fund IEFA was designed to be the cost-effect alternative to.
IEFA holds 2,461 stocks, giving it a deep bench compared to some other international equity funds. Many market observers are pointing to 2020 as the year ex-U.S. developed markets outpace American equities, but IEFA has been an admirable performer this year, returning 19.20% with modest volatility.
iShares Edge MSCI USA Quality Factor ETF (QUAL)
Expense Ratio: 0.15%
The iShares Edge MSCI USA Quality Factor ETF (CBOE:QUAL) probably won’t finish in the top 10 among new assets added, but with year-to-date inflows of $6.06 billion, more than a third of which have arrived this quarter, QUAL is one of the best ETFs among factor strategies regarding packing on assets in 2019.
QUAL, which follows the MSCI USA Sector Neutral Quality Index, is another example of a strategy at the right place at the right time. The quality factor has been in style this year as investors have sought alternatives to growth and low volatility. Plus, the spate of non-yet-profitable initial public offerings (IPOs) is reminding investors that profitability matters. QUAL is proving as much as its beating the S&P 500 by 460 basis points this year.
QUAL is home to 125 stocks and seven of its top 10 holdings are members of the Dow Jones Industrial Average. Quality and low volatility are distinct factors, but QUAL has reduced volatility traits, as highlighted by a standard deviation of just 12.35%. If there’s a risk with this best ETF heading into 2020 it’s that quality stocks are now richly valued, but that doesn’t mean big declines are imminent.
iShares Edge MSCI Min Vol USA ETF (USMV)
Expense Ratio: 0.15%
Speaking of the low volatility factor, funds with dedicated exposure are among the best ETFs in terms of performance and adding capital this year. The iShares Edge MSCI Min Vol USA ETF (CBOE:USMV) is certainly part of that group as its $12.41 billion in 2019 inflows are exceeded by just one other ETF.
The primary trade-off with low volatility funds is giving up some gains to guard against downside, but that scenario isn’t perpetual. Just look at USMV, which is higher by more than 25% this year, trailing the S&P 500 by a barely noticeable margin. That’s not a one-off occurrence, either. Due to the lower drawdowns, USMV can outperform traditional equity benchmarks over long periods of time.
A surprising element to USMV’s success is that the fun isn’t overly reliant on the traditional low volatility sectors, such as real estate and utilities. Nor does it run away from technology, a group perceived as being high beta. In fact, USMV devotes almost 18% of its weight to tech stocks, more than its combined utilities and real estate exposure.
Financial Select Sector SPDR (XLF)
Expense Ratio: 0.13%
The Financial Select Sector SPDR (NYSEARCA:XLF) won’t be among the best ETFs for assets added for 2019, but it sure has picked up momentum in the fourth quarter, raking in an impressive $2.17 billion while surging nearly 7%.
The fact that XLF is up almost 27% this year, outpacing the S&P 500 in the process, when considering that the Federal Reserve has lowered interest rates three times. Good news on that front: the Federal Reserve appears to be holding off on rate cuts for the time being due to the sturdiness of the U.S. economy.
XLF may not match this year’s performance in 2020, particularly if presidential candidates take aim at Wall Street, but the fund has potential to deliver decent gains backstopped by its value purview and rising dividends in the financial services sector.
ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
Expense Ratio: 0.35%
The ProShares S&P 500 Dividend Aristocrats ETF (CBOE:NOBL) is one of the best ETF stories among dividend funds this year for multiple reasons. Yes, it’s impressive that investors have added $1.61 billion to NOBL this year, a healthy percentage of the fund’s $5.51 billion in assets under management as of Sept. 30.
NOBL’s 57 holdings are companies that have raised dividends for at least 25 consecutive years, giving the fund a quality tilt and volatility reducing capability. However, NOBL’s performance has mostly matched that of the broader, accentuating its low volatility characteristics even more. Another perk: although NOBL emphasizes dividend growers, its roster isn’t richly valued.
Stellar performances by dividend names this year “hasn’t made dividend-paying equities on the whole particularly expensive, according to an analysis by Ed Clissold, chief U.S. strategist at Ned Davis Research,” reports Chris Matthews for MarketWatch.
iShares 20+ Year Treasury Bond ETF (TLT)
Expense Ratio: 0.15%
With a duration of 18.15 years, the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) is one of the best ETFs for a rate-cutting environment. The fund is proving as much this year with a gain of 17.37%, which is arguably amazing considering that this Treasury fund comes with less risk than equities.
Investors are certainly hip to the TLT story as the fund has hauled in $8.01 billion in new assets this year, making it one of the best ETFs on that basis.
Expecting TLT to replicate that performance again next year may be asking a bit much, particularly if the Fed doesn’t lower interest, but barring a surprise spike in long-term rates, TLT should again be steady.
Todd Shriber owns shares of XLF.