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July 7, 2021
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Exchange-traded funds (ETFs) have become tremendously popular in the last decade and now hold trillions of dollars in assets. ETFs allow investors to buy a collection of stocks or other assets in just one fund with (usually) low expenses, and they trade on an exchange like stocks.
But with literally thousands of ETFs to choose from, where does an investor start? And with the stock market rising furiously after an initial plunge as part of the coronavirus crisis, what are the best ETFs to buy?
How ETFs work
An exchange-traded fund is an investment fund that trades on a stock exchange. ETFs hold positions in many different assets, including stocks, bonds and sometimes commodities.
An ETF often tracks a specific index such as the Standard & Poor’s 500 or the Nasdaq 100, meaning it holds positions in the index companies at their same relative weight in the index.
So by buying one share in the ETF, an investor effectively purchases a (tiny) share in all the assets held in the fund.
ETFs are often themed around a specific collection of stocks. An S&P 500 index fund is one of the most popular themes, but themes also include value or growth stocks, dividend-paying stocks, country-based investments, specific industries like information technology or healthcare, various bond maturities (short, medium and long) and many others.
The ETF’s return depends on the investments that it owns. If the investments do well, then the ETF’s price will rise. If the investments do poorly, then the ETF’s price will fall.
For running an ETF, the fund company charges a small fee called an expense ratio. The expense ratio is the annual percentage of your total investment in the fund. For example, an ETF might charge a fee of 0.12 percent. That means on an annual basis an investor would pay $12 for every $10,000 invested in the fund. This low cost makes ETFs popular with investors.
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Best ETFs for 2021
ETFs allow investors to focus on a specific niche of the market or even invest in the market as a whole. Below are some of the top ETFs by category, including some highly specialized funds.
Top equity ETFs
Equity ETFs provide exposure to a portfolio of publicly traded stocks and may be divided into several categories by where the stock is listed, whether it pays a dividend, or what sector it’s in. So investors can find the kind of stock funds they want exposure to and buy only stocks that meet certain criteria.
Stock ETFs tend to be more volatile than other kinds of investments, but they’re suitable for long-term investors looking to build wealth. Some of the most popular equity ETF sectors include:
U.S. market-cap index ETFs
This kind of ETF gives investors broad exposure to publicly traded companies listed on American exchanges using a passive investment approach that tracks a major index such as the S&P 500 or Nasdaq 100.
Some of the most widely held ETFs in this group include SPDR S&P 500 ETF Trust (SPY), iShares Core S&P 500 ETF (IVV), Vanguard S&P 500 ETF (VOO) and Invesco QQQ Trust (QQQ).
This kind of ETF can provide targeted exposure to international publicly traded companies broadly or by more specific geographic area, such as Asia, Europe or emerging markets. Investing in foreign companies introduces concerns such as currency risk and governance risks, since foreign countries may not offer the same protections for investors as the U.S. does.
Some of the most widely held ETFs include Vanguard FTSE Developed Markets ETF (VEA), iShares Core MSCI EAFE ETF (IEFA), Vanguard FTSE Emerging Markets ETF (VWO) and Vanguard Total International Stock ETF (VXUS).
This kind of ETF gives investors a way to buy stock in specific industries, such as consumer staples, energy, financials, healthcare, technology and more. These ETFs are typically passive, meaning they track a specific preset index of stocks and simply mechanically follow the index.
Some of the most widely held ETFs include Vanguard Information Technology ETF (VGT), Financial Select Sector SPDR Fund (XLF), Energy Select Sector SPDR Fund (XLE) and Industrial Select Sector SPDR Fund (XLI).
This kind of ETF gives investors a way to buy only stocks that pay a dividend. A dividend ETF is usually passively managed, meaning it mechanically tracks an index of dividend-paying firms. This kind of ETF is usually more stable than a total market ETF, and it may be attractive to those looking for investments that produce income, such as retirees.
Some of the most widely held ETFs here include Vanguard Dividend Appreciation ETF (VIG), Vanguard High Dividend Yield Index ETF (VYM) and Schwab U.S. Dividend Equity ETF (SCHD).