Top-Rated ETFs to Buy and Hold
Top-Rated ETFs to Buy and Hold
Exchange-traded funds, or ETFs, give investors exposure to numerous stocks, making it easier to diversify portfolios. That certainly came in handy as markets turned rougher this past week. However, portfolio diversification doesn't mean much if a fund tends to lose money or doesn't achieve its objective.
While the stock market doesn't offer any guarantees, top-rated ETFs have a higher chance of delivering on their promises. Whether you want to beat the market or generate high cash flow without much volatility, an ETF with a five-star rating from Morningstar is more likely to get the job done.
Stuart Schiffman, founder and managing partner of Compound Wealth Advisors, says that investors can view Morningstar as one reliable resource for their ETF research: "Morningstar regularly reviews most ETFs and rates them two ways. The first rating is based on past performance relative to peers. These rankings range from 1 to 5 stars. The second rating system is based on a review of five key metrics related to performance, such as manager experience and investment process. Analyst rankings range from neutral to gold star."
What Are the Advantages of ETFs?
Investors can find ETFs that follow a wide range of strategies, such as mirroring the S&P 500 or using covered calls to boost their yields. ETFs allow investors to take a hands-off approach instead of being actively involved in the stock market. Steven Conners, founder and president of Conners Wealth Management, says it's even easier if you focus on passive index funds: "Many ETFs track an index, which allows for less due diligence compared to an individual stock (or bond). For example, SPDR Dow Jones Industrial Average ETF (ticker: DIA), State Street's Dow Jones ETF. It just tracks the Dow Industrials," he says.
How to Analyze an ETF
While an ETF that has good historical returns may look promising, it's important to conduct a deeper dive into any fund before buying shares. The first step to investing in an ETF is to be familiar with the holdings and confirm a low expense ratio, good performance history, liquidity and tax efficiency.
You'll also want to determine your risk tolerance and how an ETF aligns with your long-term financial goals. Analyzing your own financial situation is paramount to choosing the right ETF for you, since each investor is different. Whether you're focused on long-term growth, the lowest possible risk, a new income stream or diversification into international markets, your financial parameters will determine how you want your ETF holdings to perform. For example, if you need income, a dividend-paying ETF works well, but if you're mostly focused on safety, a bond ETF can provide stability. Emerging-market ETFs as well as long-term index funds can provide diversification.
Each of the ETFs on this list have earned a five-star rating from Morningstar and have outperformed the S&P 500 over the past five years:
Top-Rated ETF
VanEck Semiconductor ETF (SMH)
iShares S&P 100 ETF (OEF)
Schwab U.S. Large-Cap Growth ETF (SCHG)
Vanguard Russell 1000 Growth ETF (VONG)
Invesco S&P 500 Top 50 ETF (XLG)
iShares U.S. Technology ETF (IYW)
While the stock market doesn't offer any guarantees, top-rated ETFs have a higher chance of delivering on their promises. Whether you want to beat the market or generate high cash flow without much volatility, an ETF with a five-star rating from Morningstar is more likely to get the job done.
Stuart Schiffman, founder and managing partner of Compound Wealth Advisors, says that investors can view Morningstar as one reliable resource for their ETF research: "Morningstar regularly reviews most ETFs and rates them two ways. The first rating is based on past performance relative to peers. These rankings range from 1 to 5 stars. The second rating system is based on a review of five key metrics related to performance, such as manager experience and investment process. Analyst rankings range from neutral to gold star."
What Are the Advantages of ETFs?
Investors can find ETFs that follow a wide range of strategies, such as mirroring the S&P 500 or using covered calls to boost their yields. ETFs allow investors to take a hands-off approach instead of being actively involved in the stock market. Steven Conners, founder and president of Conners Wealth Management, says it's even easier if you focus on passive index funds: "Many ETFs track an index, which allows for less due diligence compared to an individual stock (or bond). For example, SPDR Dow Jones Industrial Average ETF (ticker: DIA), State Street's Dow Jones ETF. It just tracks the Dow Industrials," he says.
How to Analyze an ETF
While an ETF that has good historical returns may look promising, it's important to conduct a deeper dive into any fund before buying shares. The first step to investing in an ETF is to be familiar with the holdings and confirm a low expense ratio, good performance history, liquidity and tax efficiency.
You'll also want to determine your risk tolerance and how an ETF aligns with your long-term financial goals. Analyzing your own financial situation is paramount to choosing the right ETF for you, since each investor is different. Whether you're focused on long-term growth, the lowest possible risk, a new income stream or diversification into international markets, your financial parameters will determine how you want your ETF holdings to perform. For example, if you need income, a dividend-paying ETF works well, but if you're mostly focused on safety, a bond ETF can provide stability. Emerging-market ETFs as well as long-term index funds can provide diversification.
Each of the ETFs on this list have earned a five-star rating from Morningstar and have outperformed the S&P 500 over the past five years:
Top-Rated ETF
VanEck Semiconductor ETF (SMH)
iShares S&P 100 ETF (OEF)
Schwab U.S. Large-Cap Growth ETF (SCHG)
Vanguard Russell 1000 Growth ETF (VONG)
Invesco S&P 500 Top 50 ETF (XLG)
iShares U.S. Technology ETF (IYW)
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Re: Top-Rated ETFs to Buy and Hold
VanEck Semiconductor ETF (SMH)
This passively managed fund has outperformed the S&P 500 and most ETFs in recent years, riding on the semiconductor industry's success. The five-star ETF has a five-year total annualized return of 28.2%, as its large Nvidia Corp. (NVDA) position has boosted it to new heights. Volatility due to economic and political uncertainty have driven the ETF's one-year return down to -4.2% as of March 10, but the importance of semiconductors to technological advancement is not going to change anytime soon.
Nvidia made up 17.7% of the VanEck Semiconductor ETF's total assets as of March 6. Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) and Broadcom Inc. (AVGO) also made up a combined 21.2% of the fund's positions. So SMH shareholders end up with three stocks that make up about 40% of total assets, but the portfolio has worked for short- and long-term investors.
Over 10 years, SMH has returned an astounding average annual total return of 24.1%.
This passively managed fund has outperformed the S&P 500 and most ETFs in recent years, riding on the semiconductor industry's success. The five-star ETF has a five-year total annualized return of 28.2%, as its large Nvidia Corp. (NVDA) position has boosted it to new heights. Volatility due to economic and political uncertainty have driven the ETF's one-year return down to -4.2% as of March 10, but the importance of semiconductors to technological advancement is not going to change anytime soon.
Nvidia made up 17.7% of the VanEck Semiconductor ETF's total assets as of March 6. Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) and Broadcom Inc. (AVGO) also made up a combined 21.2% of the fund's positions. So SMH shareholders end up with three stocks that make up about 40% of total assets, but the portfolio has worked for short- and long-term investors.
Over 10 years, SMH has returned an astounding average annual total return of 24.1%.
Re: Top-Rated ETFs to Buy and Hold
iShares S&P 100 ETF (OEF)
The passive iShares S&P 100 ETF gives investors exposure to the top 100 S&P 500 holdings by market capitalization. You'll find most of the Magnificent Seven stocks jostling for the top 10 positions within the fund, which make up roughly half of the fund's total assets.
OEF has a five-year annualized return of 17.4%. It's also held double-digit annualized gains over the past decade and the past 15 years. More than one-third of the fund's total assets are allocated to the information technology sector. While OEF has capital spread across several sectors, you'll get less exposure to utilities (1%), materials (0.7%) and real estate (0.5%).
The passive iShares S&P 100 ETF gives investors exposure to the top 100 S&P 500 holdings by market capitalization. You'll find most of the Magnificent Seven stocks jostling for the top 10 positions within the fund, which make up roughly half of the fund's total assets.
OEF has a five-year annualized return of 17.4%. It's also held double-digit annualized gains over the past decade and the past 15 years. More than one-third of the fund's total assets are allocated to the information technology sector. While OEF has capital spread across several sectors, you'll get less exposure to utilities (1%), materials (0.7%) and real estate (0.5%).
Re: Top-Rated ETFs to Buy and Hold
Schwab U.S. Large-Cap Growth ETF (SCHG)
Five-star-rated Schwab U.S. Large-Cap Growth ETF aims to mirror the total returns of the Dow Jones U.S. Large-Cap Growth Total Stock Market Index. The fund has a generous 0.04% expense ratio and, as the name suggests, prioritizes large-cap growth stocks. The fund's top three holdings as of March 8 are familiar ones: Apple Inc. (AAPL) (11.5%), Microsoft Corp. (MSFT) (9.3%) and Nvidia (8.8%). These percentages have likely changed in the past few days with the recent tech sell-off, however.
A common theme among many top-performing ETFs is that they consist of large-cap stocks, especially the Magnificent Seven. "Today, the market has become very efficient, and the best option is simply to replicate good practices rather than find inefficiencies," says Julia Khandoshko, CEO of European broker Mind Money. "In these terms, large-cap stocks are better as they are issued by larger companies possessing vast amounts of data, skills and technologies. Moreover, management fees are usually lower within large-cap ETFs, which is another advantage."
Five-star-rated Schwab U.S. Large-Cap Growth ETF aims to mirror the total returns of the Dow Jones U.S. Large-Cap Growth Total Stock Market Index. The fund has a generous 0.04% expense ratio and, as the name suggests, prioritizes large-cap growth stocks. The fund's top three holdings as of March 8 are familiar ones: Apple Inc. (AAPL) (11.5%), Microsoft Corp. (MSFT) (9.3%) and Nvidia (8.8%). These percentages have likely changed in the past few days with the recent tech sell-off, however.
A common theme among many top-performing ETFs is that they consist of large-cap stocks, especially the Magnificent Seven. "Today, the market has become very efficient, and the best option is simply to replicate good practices rather than find inefficiencies," says Julia Khandoshko, CEO of European broker Mind Money. "In these terms, large-cap stocks are better as they are issued by larger companies possessing vast amounts of data, skills and technologies. Moreover, management fees are usually lower within large-cap ETFs, which is another advantage."
Re: Top-Rated ETFs to Buy and Hold
Vanguard Russell 1000 Growth ETF (VONG)
The Vanguard Russell 1000 Growth ETF has soared a cumulative 130% over the past five years, so it's easy to see how it earned its Morningstar five-star rating. The fund focuses on large growth stocks in the Russell 1000 Growth Index, and it has a 0.07% expense ratio.
Although VONG has roughly 400 equity holdings, it follows the same script as many of the five-star funds. More than half of the fund's total assets go toward technology companies, and its top 10 list is filled with Magnificent Seven stocks. Apple, Nvidia and Microsoft make up a combined one-third of the fund's total assets.
Long-term investors have enjoyed an annualized return of 18% over the past five years, and 15% in the past 10.
The Vanguard Russell 1000 Growth ETF has soared a cumulative 130% over the past five years, so it's easy to see how it earned its Morningstar five-star rating. The fund focuses on large growth stocks in the Russell 1000 Growth Index, and it has a 0.07% expense ratio.
Although VONG has roughly 400 equity holdings, it follows the same script as many of the five-star funds. More than half of the fund's total assets go toward technology companies, and its top 10 list is filled with Magnificent Seven stocks. Apple, Nvidia and Microsoft make up a combined one-third of the fund's total assets.
Long-term investors have enjoyed an annualized return of 18% over the past five years, and 15% in the past 10.
Re: Top-Rated ETFs to Buy and Hold
Invesco S&P 500 Top 50 ETF (XLG)
The Invesco S&P 500 Top 50 ETF takes OEF's concept a step further. Instead of offering exposure to the top 100 leading companies in the S&P 500, XLG only holds onto the top 50. More than 30% of its assets are routed into Apple, Nvidia and Microsoft.
A strong concentration in the Magnificent Seven stocks has been a boon for investors. XLG has an annualized return of 18% over the past five years. That's higher than OEF, and both of those funds have outperformed the S&P 500. For now, concentrating on the top winners within the S&P 500 has yielded better results than having exposure to the entire index.
The Invesco S&P 500 Top 50 ETF takes OEF's concept a step further. Instead of offering exposure to the top 100 leading companies in the S&P 500, XLG only holds onto the top 50. More than 30% of its assets are routed into Apple, Nvidia and Microsoft.
A strong concentration in the Magnificent Seven stocks has been a boon for investors. XLG has an annualized return of 18% over the past five years. That's higher than OEF, and both of those funds have outperformed the S&P 500. For now, concentrating on the top winners within the S&P 500 has yielded better results than having exposure to the entire index.
Re: Top-Rated ETFs to Buy and Hold
iShares U.S. Technology ETF (IYW)
The iShares U.S. Technology ETF has more than doubled over the past five years and has a 0.39% expense ratio. This top-performing fund uses the Russell 1000 Technology RIC 22.5/45 Capped Index as its benchmark.
The fund has 141 equity holdings, with the usual trio of Apple, Nvidia and Microsoft in its top spots. While these three stocks are common themes, IYW has a larger concentration in than most of the other funds.
IYW has a five-year annualized return of 20.6% by net asset value, or NAV. Its annualized return remains above 20% even when looking at 10-year and 15-year results.
The iShares U.S. Technology ETF has more than doubled over the past five years and has a 0.39% expense ratio. This top-performing fund uses the Russell 1000 Technology RIC 22.5/45 Capped Index as its benchmark.
The fund has 141 equity holdings, with the usual trio of Apple, Nvidia and Microsoft in its top spots. While these three stocks are common themes, IYW has a larger concentration in than most of the other funds.
IYW has a five-year annualized return of 20.6% by net asset value, or NAV. Its annualized return remains above 20% even when looking at 10-year and 15-year results.
Re: Top-Rated ETFs to Buy and Hold
Vanguard Information Technology ETF (VGT)
The Vanguard Information Technology ETF consists of 316 equity holdings with a large focus on the Magnificent Seven stocks. The firm has outsized exposure to Apple, Nvidia and Microsoft as well, but it's not quite as dramatic as IYW's allotment. The five-star tech index fund has a low 0.09% expense ratio and a trailing-12-month yield of 0.6%. Its 30-day SEC yield is slightly lower, at 0.5%.
VGT has comfortably outpaced the S&P 500 and has an annualized NAV return of 19.9% over the past five years. The fund also has a return of 6.2% over the past year, showing more resilience than some other tech funds in the latest market rout. VGT has a 15-year annualized return of 17.7%, which is quite an accomplishment and partially due to its lower fees.
The Vanguard Information Technology ETF consists of 316 equity holdings with a large focus on the Magnificent Seven stocks. The firm has outsized exposure to Apple, Nvidia and Microsoft as well, but it's not quite as dramatic as IYW's allotment. The five-star tech index fund has a low 0.09% expense ratio and a trailing-12-month yield of 0.6%. Its 30-day SEC yield is slightly lower, at 0.5%.
VGT has comfortably outpaced the S&P 500 and has an annualized NAV return of 19.9% over the past five years. The fund also has a return of 6.2% over the past year, showing more resilience than some other tech funds in the latest market rout. VGT has a 15-year annualized return of 17.7%, which is quite an accomplishment and partially due to its lower fees.