A better way to build a portfolio.
It used to be that your broker or financial advisor might put you in a handful of individual stocks, a mix of their suggestions and your suggestions. That, in essence, would be your portfolio, and if one of you wasn’t a great stock picker, you were out of luck. With the rise of exchange-traded funds, or ETFs, in recent decades, those days are gone. For far cheaper than a financial advisor, you can own a basket of dozens, hundreds or even thousands of stocks focused on a certain theme or tracking a certain index. This cheap and easy way to match certain parts of the market can make sense for investors both large and small — but with so many options to pick from, here are 10 of the best ETFs to buy for 2021.
SPDR S&P 500 ETF (ticker: SPY)
SPY has long been one of the best ETFs to buy, and will likely remain a contender for years to come; it’s the single largest ETF by assets under management (AUM), with around $360 billion to its name. It’s extremely liquid — an important and sometimes overlooked quality of ETFs, trading more than 74 million shares per day. By tracking the S&P 500, SPY and its incredibly low 0.09% expense ratio represent perhaps the simplest way to bet on big business in the U.S. A great place for novice and expert investors alike to park cash, SPY will give you returns that almost exactly mimic the market itself without an ounce of research required.
Invesco QQQ ETF (QQQ)
The Invesco QQQ ETF is another foolproof way to track a major index, though this one tracks the Nasdaq-100, an index of the 100 largest nonfinancial members of the Nasdaq Stock Market. QQQ’s biggest strength — and weakness — is its lack of diversification in comparison to a more inclusive ETF like SPY. Not only does it track one-fifth as many companies as SPY, QQQ’s benchmark index, the Nasdaq-100, is dominated by technology companies. This has proved to be a lucrative bias in an era of Big Tech dominance — QQQ has returned 25.9% annually over the last three years to SPY’s 17% — but it’s a double-edged sword, doomed to underperform should tech ever fall by the wayside. The expense ratio on QQQ is an extremely reasonable 0.2%.
Ark Genomic Revolution ETF (ARKG)
Unlike the other ETFs on this list, ARKG is an actively managed fund, which means its expense ratio is higher than passively managed ETFs that merely buy and hold. It’ll cost you 0.75% annually to own, and its focus is on genomics and the ongoing effort to extend human and other life. This means the fund tends to invest in high-risk, high-reward, cutting-edge health care and biotechnology names, including those involved with CRISPR gene-editing, stem cells and agricultural biology, to name a few areas. Run by prominent fund manager Cathie Wood, ARKG has returned a compounded 40.3% over the last five years, an exceptional track record that will likely be hard to duplicate. The fund typically holds between 30 and 50 stocks at any given time, although turnover can be relatively high.
Vanguard Growth ETF (VUG)
If you’re the type of investor who cares more about growth than dividends or inherently low-risk companies, this growth-focused ETF from industry leader Vanguard is right up your alley. Because it focuses on large-cap U.S.-based growth stocks, you’ll find the usual suspects among its largest holdings: stakes in Apple (AAPL), Microsoft (MSFT), Amazon.com (AMZN), Facebook (FB) and Alphabet (GOOG, GOOGL) constitute about one-third of its overall portfolio, despite VUG holding 280 different stocks. The insanely low expense ratio means investors will pay just $4 per year for every $10,000 of VUG they own. The index VUG tracks, the CRSP U.S. Large Cap Growth Index, follows stocks with an established excellence in earnings per share (EPS) growth and expected short-term EPS growth.
Schwab U.S. Small-Cap ETF (SCHA)
If you’re tired of the well-trod indices and well-known names that are found among the other best ETFs to buy, SCHA can provide exposure to the U.S. stock market, but limits its portfolio to smaller stocks, which tend to have greater growth potential than much larger companies. It’s an extremely well-diversified fund, with more than 1,850 holdings and an average market capitalization of $4.6 billion. Some of its top 10 holdings include 10x Genomics (TXG), which makes gene sequencing technology, and Darling Ingredients (DAR), a rendering company that turns animal byproduct into useful end products. The $15 billion fund has a rock-bottom 0.04% expense ratio and will offer diversification for many investors who don’t have much exposure to lesser-known names.
iShares MSCI USA Min Vol Factor ETF (USMV)
If you want to be invested in the stock market but aren’t the biggest fan of all the volatility that comes with it, an ETF like USMV is an excellent place to start. It’s built to give investors a good chunk of the returns that someone invested in the S&P 500 might enjoy, but a far smaller chunk of the downside. It does this by investing in stocks that historically display lower volatility, with names like Eli Lilly (LLY), Kroger (KR), Waste Management (WM) and Johnson & Johnson (JNJ) among its top holdings. Since its launch in 2011, USMV has achieved its main objective, capturing 76% of the upside in stocks and just 62% of the downside.
iShares Core High Dividend ETF (HDV)
Where oh where is an income investor to go if they also want exposure to the stock market and the diversification that an ETF offers? Thankfully, there’s a fund for that, and it’s unambiguously named the iShares Core High Dividend ETF. It’s more concentrated than some of the other funds on this list, with 74 holdings in its portfolio, but its expense ratio is just 0.08% and its dividend yield sits at 3.7% — a tidy sum in the current era of low interest rates the U.S. has been in for over a decade now. The high dividend and portfolio of stable stocks makes this one of the best ETFs to buy. Three of HDV’s top holdings include Exxon Mobil (XOM), Johnson & Johnson and Verizon Communications (VZ).
Vanguard FTSE All-World ex-US ETF (VEU)
Technically speaking, while all of the aforementioned funds can offer investors varying levels of diversification, each of them was lacking an important aspect of diversification, as all were dominated by U.S. stocks. Switching up investments geographically is actually one of the best ways to truly diversify, as it gives exposures to other economies and other currencies. Most Americans likely don’t mull over the fact that their salaries, retirement nest eggs and assets themselves are entirely married to the U.S. economy and the U.S. dollar. This fund’s 0.08% expense ratio is on the lower end for any ETF, but especially for international ETFs, which tend to have higher management fees. VEU holds more than 3,500 stocks across all geographies excluding the U.S. Its three largest regional allocations are Europe (40.2%), Pacific (27.6%) and emerging markets (25.6%).
Vanguard FTSE Emerging Markets ETF (VWO)
VWO differs from VEU in a couple important respects. The most important difference is it discriminates more against the better-developed parts of the world, focusing instead on up-and-coming markets with long-term growth potential. It holds more than 5,200 stocks, making it plenty diversified within nations like China, Brazil, Taiwan and South Africa. Some of the top holdings include Taiwan Semiconductor Manufacturing Co. (TSM), Tencent Holdings (TCEHY), Alibaba Group Holding (BABA) and Meituan (MPNGY). The ETF has an excellent expense ratio at just 0.1%, although its trailing returns aren’t much to brag about, returning about 3.6% annually over the last 10 years.
iShares MSCI KLD 400 Social ETF (DSI)
Socially responsible investing has never been more popular than it is today, and by looking at DSI’s performance over recent years, it’s not hard to see why: The ETF has returned an annualized 13.8% over the last 10 years. The fund focuses on U.S.-based companies with an environmental, social and governance (ESG) bent to them, excluding business areas like alcohol, weapons, gambling, tobacco and genetically modified organisms. It has an expense ratio of 0.25%, holds 404 positions and its top positions include Microsoft, Alphabet, Tesla (TSLA) and Nvidia Corp. (NVDA). The fund manages more than $3 billion in assets for now, but the larger the ESG trend gets, the more assets should grow, and the more companies will try to adjust their businesses to meet eligibility criteria.
The 10 best ETFs to buy for 2021:
— SPDR S&P 500 ETF (SPY)
— Invesco QQQ ETF (QQQ)
— Ark Genomic Revolution ETF (ARKG)
— Vanguard Growth ETF (VUG)
— Schwab U.S. Small-Cap ETF (SCHA)
— iShares MSCI USA Min Vol Factor ETF (USMV)
— iShares Core High Dividend ETF (HDV)
— Vanguard FTSE All-World ex-US ETF (VEU)
— Vanguard FTSE Emerging Markets ETF (VWO)
— iShares MSCI KLD 400 Social ETF (DSI)
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Update 06/21/21: This story was published at an earlier date and has been updated with new information.