Exchange-traded funds continue to be one of the largest market segments of the U.S. The Investment Companies Institute reports that as of the end of the second quarter, there are 2,111 ETFs in the U.S. market. And that number is up by 37.7% in just over the trailing five years. For investors, this means that there are certainly some top-notch ETFs to buy.
Number of U.S. ETFs in the Market
Investors truly have a plethora of choices across all sorts of asset classes — including both passive index-based issues and newer active issues.
My specialties involve economic and market data and developments. And in turn, I specialize in finding the best individual securities from the stock and bond markets to capitalize on those developments. This is what I showcase in my Profitable Investing.
However, I understand that some investors want recommendations for ETFs to buy. The growth in the U.S. market really backs that up. It may be that portfolios are in smaller sums, or are part of administered qualified retirement accounts including IRAs, 401ks, 403bs and SEPs.
Inside the model portfolios of Profitable Investing I have a collection of model mutual fund portfolios. And in all of the mutual fund portfolios, I provide an allocation to specific funds which seeks to match up to my main portfolio of individual securities in allocations and strategies.
Here are seven smarter ETFs to buy right now:
- Vanguard High Dividend Yield ETF (NYSEARCA:VYM)
- Vanguard Real Estate ETF (NYSEARCA:VNQ)
- Vanguard Utilities ETF (NYSEARCA:VPU)
- Vanguard Information Technology ETF (NYSEARCA:VGT)
- Vanguard Health Care ETF (NYSEARCA:VHT)
- Vanguard Intermediate-Term Corporate Bond ETF (NASDAQ:VCIT)
- Vanguard Tax-Exempt Bond ETF (NYSEARCA:VTEB)
ETFs to Buy: Vanguard High Dividend Yield ETF (VYM)
My starting point with ETFs to buy is the Vanguard High Dividend Yield ETF. This is an indexed ETF which is focused on U.S.-listed stocks. And the stocks in this ETF pay higher-than-average dividends, nearly all in the U.S. market.
This is my more measured approach to the S&P 500 as the higher weightings on dividends provides less risk and volatility.
VYM and S&P 500 Total Return
You’ll note that over the past ten years this Vanguard ETF has generally provided more consistent total return, including dividend income. And in 2018 during the severe downturn in the S&P 500, the ETF held up much better.
But for 2019, with a drive toward more aggressive stocks — particularly in the technology sector — Vanguard has lagged. The same has been true since March of this year. But my view is that I want to achieve a lower volatility and lower-risk return over time.
Vanguard Real Estate ETF (VNQ)
Next in my stock allocation is in real estate investment trusts (REITs). With ETFs to buy, I achieve this with the Vanguard Real Estate ETF. REITs continue to benefit from a growing U.S. economy that is fueling property demand and better rental income. And with low inflation, overall funding costs are reduced.
REITs continue to provide lower-risk growth as they are mainly focused on U.S.-centric assets away from global economic challenges. And while some sectors in REITs such as hospitality and retail have been severely hindered, the bulk of REITs have been a good source of income and growth.
And as noted above, low inflation and rising revenues — even with the novel coronavirus — feed more valuable dividend income.
VNQ and S&P 500 Total Return
For the trailing two years alone, the REIT ETF has been a better performer than the S&P 500. Only recently have we seen the tech-heavy S&P 500 start to recover quickly.
And with a dividend yield of 3.7%, the ETF out-pays the S&P 500 by a significant margin. With consistency based on real assets and defended dividend income, REITs in the ETF are a great way to achieve measured growth with higher income.
ETFs to Buy: Vanguard Utilities ETF (VPU)
Next on my list of ETFs to buy is the Vanguard Utilities ETF. Like for REITs, U.S. utilities are insulated from global woes and continue to capitalize on the post-pandemic recovery.
The best utilities are combinations of regulated local services and unregulated wholesale businesses. The combination of dependable revenues, profit margins and added growth and income from additional unregulated operations makes for a great way to generate income and dividends with growth over time.
VPU and S&P 500 Total Return
The returns for VPU over the trailing five years have generally been more consistent than for the S&P 500. Only during more go-go times such as the recent recovery where the S&P 500 has pulled ahead.
But for more longer-term consistency and income it makes for a great addition to an ETF portfolio.
Vanguard Information Technology ETF (VGT)
Now I come to the exciting part of the U.S. market — information technology. Technology is a big growth engine for the U.S. economy. And the stocks in this segment reflect optimism for higher returns. I accomplish this allocation with the Vanguard Information Technology ETF.
Technology is the alchemy of the market. Whether products come from silicon or the ether in the minds of software developers, profits can be achieved in momentous amounts. But not all big ideas work. And there are always brand-new products and services making for volatile markets.
So, while investors need exposure, it should be done as part of a broader portfolio.
VGT and S&P 500 Total Return
The technology market has been a good one, and VGT has returned 195.1% over just the past five years. That outpaces the S&P 500 2.5 times.
ETFs to Buy: Vanguard Health Care ETF (VHT)
The coronavirus has been an awakening for healthcare companies and the stocks behind them. The drive for treatments and vaccines not only has drawn attention to the leaders in this segment, but has also resulted in improving broader segment revenues.
The Vanguard Health Care ETF is my go-to healthcare ETF.
VHT & S&P 500 Total Return
The potential of this ETF — and the broader healthcare segment — is really shining through. It was one of the only sectors inside the S&P 500 that generated an increase in earnings for the second quarter. Plus, healthcare companies overall expect good performance for the rest of 2020 and 2021.
No wonder that year to date the VHT has outperformed the S&P 500. And for a healthier portfolio, VHT is a smart allocation.
Vanguard Intermediate-Term Corporate Bond ETF (VCIT)
Fixed income in the U.S. continues to be very good. The U.S. has very low inflation, with little threat for some time to follow. This has led to lower yields and higher bond prices overall. And with the Federal Reserve’s responses to the market chaos earlier this year, bonds have been bigger performers, beating many stock-market sectors.
But there are two sectors which I continue to advocate for — corporate bonds and municipal bonds.
Corporate bonds continue to benefit from the growing economy, which aids credit conditions of businesses and bolsters their bond prices. And until recently, issuance has been slower, aiding supply and demand for higher prices.
My allocation to this market is in the Vanguard Intermediate-Term Corporate Bond ETF. This ETF has returned 34.2%% over the trailing five years. This significantly outpaces the general U.S. bond market as tracked by the Bloomberg Barclays U.S. Aggregate Index.
VCIT and Bloomberg Barclays U.S. Aggregate Index Total Return
ETFs to Buy: Vanguard Tax-Exempt Bond ETF (VTEB)
For municipal bonds, I have the Vanguard Tax-Exempt Bond ETF. Municipal bonds have been gaining like corporate bonds on the recovering economy. Tax revenues are better than expected, aiding the credit of issuers. Low inflation aids bonds as well. And issuance has been muted as many issuers have not had the need or the political will to sell more bonds.
VTEB and Bloomberg Barclays U.S. Aggregate Index Total Return
VTEB has been a consistent outperformer against the U.S. Aggregate Bond Index over the trailing five years. And even as it has trailed a bit in the recovery, remember that it offers a lot more yield than U.S. Treasurys on a tax-equivalent basis. I see further price growth through year-end and into 2021.
And note, even if you invest in qualified investment accounts, I still recommend the tax-free ETF for total return and not just for tax-free income.
Neil George was once an all-star bond trader, but now he works morning and night to steer readers away from traps — and into safe, top-performing income investments. Neil’s new income program is a cash-generating machine … one that can help you collect $208 every day the market’s open. Neil does not have any holdings in the securities mentioned above.