The 7 Best ETFs for a Truly Diversified Portfolio 

Best ETFs - The 7 Best ETFs for a Truly Diversified Portfolio 

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In April 2019, I put together a portfolio of exchange-traded funds that provided serious diversification. I like to think that my choices were seven of the best ETFs available. 

Fast forward 17 months, how did I do? Let’s have a quick look. 

ETF 1-Year Return
iShares Core S&P Total U.S. Stock Market ETF (NYSEARCA:ITOT) 17.1%
Multi-Asset Diversified Income ETF (NASDAQ:MDIV) -16.6%
Invesco DB Commodity Index Tracking Fund (NYSEARCA:DBC) -8.3%
ProShares Russell 2000 Dividend Growers ETF (BATS:SMDV) -10.7%
ARK Innovation ETF (NYSEARCA:ARKK) 96.5%
Vanguard FTSE Developed Markets ETF (NYSEARCA:VEA) 8.1%
SPDR Portfolio Emerging Markets ETF (NYSEARCA:SPEM) 12.7%

Assuming an equal amount invested in all seven ETFs, the average performance over the past year is 14.1%. The performance of the SPDR S&P 500 ETF Trust over the past year is 17.7%.

While I’m disappointed in the fact I underperformed, I think it’s fair to say that my portfolio was far more diversified. Perhaps too much so. 

Warren Buffett would argue that this example demonstrates why you should put your hard-earned capital into a low-cost S&P 500 index mutual fund or ETF and call it a day. 

  • ARK Innovation ETF (NYSEARCA:ARKK)
  • Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO)
  • Schwab US Mid-Cap ETF (NYSEARCA:SCHM)
  • WisdomTree US SmallCap Earnings ETF (NYSEARCA:EES)
  • iShares US Healthcare ETF (NYSEARCA:IYH)
  • Invesco S&P 500 Equal Weight Consumer Discretionary ETF (NYSEARCA:RCD)

He’s probably right. I’m not about to get in an argument with one of the investment industry’s smartest people. Instead, I’ll just try to select seven of the best ETFs so that in a year, I have better news to report.

Best ETFs to Buy: ARK Innovation ETF (ARKK)

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When I selected ARKK for my list of seven best ETFs a year ago in April, the ETF had total net assets of $1.6 billion. Today, they’re at $4.8 billion and climbing.

And why wouldn’t they? As I stated in my 2019 article, “[Catherine] Wood is an excellent portfolio manager. Paying 0.75% annually for someone of her caliber is a relative bargain. If I could only own one sector ETF, this would be the one.”

Heck, if I could only own one ETF, and it wasn’t SPY, I would probably go with ARKK. 

Having said that, and believing in the concept of regression to the mean, I think it’s fair to say that the ETF’s performance over the next year won’t be nearly as good as the past one. Over 3-5 years, I still like the chances of Wood delivering outsized returns. 

Her focus on disruptive innovation is more relevant today during Covid-19 than it has ever been.    

SPDR S&P 500 ETF Trust (SPY)

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Warren Buffett isn’t the only one who feels SPY is the best option for most investors looking for a little growth. After all, you don’t become the world’s largest ETF with $299 billion in net assets without having a few million people in your corner. 

In July, InvestorPlace contributor Todd Shriber suggested that SPY is good to own because it persuasively demonstrates that simpler is often better

“[T]he ETF does an efficient job of highlighting what’s working today in equity markets. For example, technology stocks represent 27.5% of the fund’s weight because investors have long favored that sector,” Shriber wrote in July. 

“On the other hand, financials are struggling this year. The sector entered 2020 as the third-largest exposure in SPY, but has since been relegated to the fifth spot.”

As Todd states and Buffett has on many occasions in the past, it ought to be a core holding for most investor portfolios. And with a fee of $9.45 per $10,000 investment, you’ll barely know it costs you anything.

In my opinion, that’s the best kind of ETF to own.

Vanguard FTSE Emerging Markets ETF (VWO)

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One of the diversification keys I like to use in these InvestorPlace portfolio articles is to contribute ETFs from as many ETF providers as possible. Spread the love, if you will. 

In my April 2019 article, I selected a State Street emerging markets ETF (SPEM). However, because I’ve gone with SPY, a State Street ETF, I thought I’d go with Vanguard’s largest emerging markets ETF at $61.5 billion in total assets. 

I like VWO because it gives you exposure to large-cap stocks in more than 24 emerging markets, including China (43.7% weighting), Taiwan (16.1%), and India (9.5%) while charging just 0.10% to gain this diversification. 

Sure, with 5,209 stocks in the ETF, and the top 10 holdings accounting for 26%, you’re talking about an average weighting of just 0.14% for the 5,199 stocks outside the top 10. 

However, if you want to own a portfolio that tries to zig when the markets zag, by owning non-correlating assets, equity ETFs in emerging markets will give you this in relation to the typical domestic equity ETF. 

Schwab US Mid-Cap ETF (SCHM)

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If you go to InvestorPlace’s Hot Topics section, you will see that one of the subjects it covers are mid-cap stocks.

“Mid-cap stocks are perhaps the most intriguing investments, as they offer the best of both worlds: the potential for growth of small-cap stocks and the stability of large-cap stocks. Technically speaking, mid-cap stocks are stocks of any company whose market cap falls between $2 and $10 billion,” the section’s preamble states. 

Whatever you do, don’t stick to this definition if you’re buying individual mid-cap stocks or an ETF like SCHM. If you do, you’ll miss out on some quality companies. Approximately 89% of its portfolio is invested in stocks with market caps between $3 billion and $15 billion, with another 6% invested in market caps between $15 billion and $70 billion. 

The ETF tracks the performance of the Dow Jones U.S. Mid-Cap Total Stock Market Index. It’s dirt cheap at 0.04% annually. SCHM currently has 507 stocks invested in $6.7 billion in total net assets. Launched in January 2011, it’s considered a mid-cap blend by 

I would personally consider owning several of its top 10 holdings, including Tractor Supply (NASDAQ:TSCO), one of America’s best-run retailers.  

For me, mid-caps are the sweet spot of investing.

WisdomTree US SmallCap ETF (EES)

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Although WisdomTree is one of the 10 largest ETF providers in the U.S., it tends to get lost in the shuffle despite the fact it has some very interesting funds utilizing fundamental characteristics.

WisdomTree has 67 ETFs. EES isn’t one of its largest at just $422.7 million. What it lacks in total net assets, it makes up for with an excellent investment case for buying the ETF. Namely, that when it comes to investing in small-cap stocks, it pays to avoid the most expensive stocks in terms of valuation, and instead focus on those most profitable. 

EES tracks the performance of the U.S. SmallCap Index. This fundamentally-weighted index uses a stock’s earnings as a percentage of the index’s total earnings to allocate a particular weighting. Companies that earn more get a more substantial weighting in the index.

So, if you had two small-cap stocks and one was overvalued at a market cap of $2 billion and $100 million in earnings, and another was undervalued at a market cap of $1 billion and $100 million in earnings, the stock with the $1-billion valuation would get a more substantial weighting under the WisdomTree ETF than it would if it were held in a market-cap-weighted ETF.

As a result, the ETF tends to lean more to value- rather than growth-oriented stocks

iShares US Healthcare ETF (IYH)

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Just as I believe that successful portfolios (ETFs or individual stocks) ought to have a healthy dose of technology investments (ARKK in this example), I also feel they should have some exposure to consumer discretionary stocks (that’s what drives the economy) and healthcare stocks (we’ll always need healthcare).

This isn’t the largest of healthcare ETFs at $2.4 billion in total net assets — that honor goes to the Health Care Select Sector SPDR ETF (NYSEARCA:XLV) at $24 billion — but it will deliver plenty of performance over the long term. 

Over the past five years, IYH has generated an annualized total return of 9%, 185 basis points higher than its healthcare peer group. Since 2010, it’s had just one year (2016) with a negative annual total return. 

People tend to get sick, something we’ve become acutely aware of during the pandemic. Good healthcare’s not crucial until a pandemic strikes, and even then, it’s no guarantee people’s lives will be saved. 

It’s not the cheapest ETF by any means, charging 0.43% annually, but it manages to get the job done. With 122 stocks, it’s got about double the number of holdings of XLV. However, the top 10 account for 47% of its total net assets, so you’re really buying 10 of this country’s largest healthcare stocks. The rest are more window dressing. 

Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RCD)

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When it comes to ETFs, I have to admit that I’m partial to equal-weighted products. I like them because it tilts the holdings a tad toward smaller companies. I also want them because the holdings are always having to produce, unlike their market cap-weighted counterparts, that get top billing for no reason other than they have large market capitalizations.

I’m facetious, of course, but I do like the fact that the ETF’s 61 holdings are rebalanced quarterly, essentially providing four races each year for investors to participate in. 

Year to date, RCD is down 9.4%, compared to a positive YTD return of 16.8% for its market-cap-weighted counterpart, the Consumer Discretionary Select Sector SPDR ETF (NYSEARCA:XLY). 

Take a look at XLY’s top 10 holdings — they account for 68% of total net assets compared to 21% for RCD — and you’ll understand why it’s so far ahead. Amazon (NASDAQ:AMZN) accounts for almost 24% of the ETF’s assets. 

That’s great when Amazon is up, but when it slips and falls, the entire portfolio is coming down with it.  

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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