One of the easiest and best ways to diversify your investment portfolio is to buy exchange-traded funds, or ETFs. These funds can hold hundreds or even thousands of different stocks, bonds and other assets, allowing you to get broad exposure in one place.
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The popularity of ETF investing has exploded in recent decades. ETFs are an excellent way to gain passive, diversified exposure to a market index, a market sector or a particular investing theme.
There are nearly 3,000 U.S.-based ETFs alone, with combined assets under management, or AUM, worth $6.5 trillion. However, not all ETFs are created equal. Here are seven of Morningstar’s five-star ETFs with plenty of liquidity, low fees and long-term upside:
| ETF | Expense ratio |
| Vanguard Information Technology ETF (ticker: VGT) | 0.10% |
| JPMorgan U.S. Quality Factor ETF (JQUA) | 0.12% |
| Schwab U.S. Dividend Equity ETF (SCHD) | 0.06% |
| iShares 0-5 Year TIPS Bond ETF (STIP) | 0.03% |
| Invesco S&P 500 Equal Weight Industrials ETF (RSPN) | 0.40% |
| Vanguard S&P 500 ETF (VOO) | 0.03% |
| iShares Core Aggressive Allocation ETF (AOA) | 0.15% |
Vanguard Information Technology ETF (VGT)
Vanguard may be best known for its mutual funds, but the investment company also has many top-rated ETFs, such as VGT. The fund earns both five stars and a gold badge from Morningstar, indicating the company’s analysts have a high conviction that VGT will outperform an index or most of its peers on a risk-adjusted basis over a market cycle.
VGT is a passively managed fund, meaning it simply tries to track an underlying benchmark index — in this case it’s the MSCI US Investable Market Information Technology 25/50 Index, which includes U.S. information technology companies of all sizes. It also means you get rock-bottom fees with a 0.1% expense ratio, putting it in the lowest quintile in terms of fees for funds in Morningstar’s technology category.
Performance-wise, VGT “has demonstrated it is relatively sturdy over a full market cycle, with notable returns compared with peers and when adjusted for risk,” writes Morningstar’s research team.
JPMorgan U.S. Quality Factor ETF (JQUA)
If you haven’t considered investing in a JPMorgan ETF, this is your sign to do so. Morningstar Associate Director Emory Zink praises the company for its “well-resourced, thoughtful and disciplined” stewardship of client assets. The company manages more than $4.6 trillion in client assets as of July, with $2.8 billion in JQUA.
JQUA looks for companies with strong quality and profitability that have the potential for enhanced returns. It aims to maintain the same sector weights as the Russell 1000, which includes 1,000 of the largest U.S. publicly traded companies. JQUA holds only 254 companies, but this aligns with its quality-over-quantity mission.
Schwab U.S. Dividend Equity ETF (SCHD)
SCHD is a “top-notch dividend strategy,” according to Morningstar analyst Ryan Jackson. It has proven “it can translate its sensible, risk-conscious approach into better risk-adjusted performance than the Russell 1000 Value Index,” which earned it a Morningstar upgrade from silver to gold this past spring.
The fund tracks the Dow Jones U.S. Dividend 100 Index, which focuses on stocks with high dividend yields and a consistent track record of dividend payments. SCHD offers nearly a 4% SEC 30-day yield, which can lead to solid returns alongside a modest 0.06% expense ratio.
Bearish investors may especially appreciate SCHD. Dividend-oriented firms with healthy balance sheets like the one included in the fund “tend to be more insulated from market movements,” giving SCHD a defensive stance, according to Jackson.
iShares 0-5 Year TIPS Bond ETF (STIP)
Five-star funds aren’t only found in the equity sector. Bond investors can also find top-rated ETFs, like the iShares 0-5 Year TIPS Bond ETF. Run by BlackRock, one of the largest asset managers in the industry with over $8.5 trillion AUM, STIP is backed by an above average team, writes Morningstar Director Jason Kephart.
“It is a market-leading index fund provider globally, and its iShares exchange-traded fund franchise offers a low-cost lineup of core funds that investors can use to build a well-diversified portfolio for dirt cheap,” he writes.
STIP is an excellent choice for investors concerned about inflation, as it invests in U.S. Treasury inflation-protected securities, or TIPS, and the principal adjusts for inflation. So as inflation rises, the principal on your bond also rises.
[READ: 4 Growth Stocks, 4 Value Stocks to Buy]
Invesco S&P 500 Equal Weight Industrials ETF (RSPN)
The S&P 500 is a market-capitalization-weighted index. Companies are weighted according to their size, so the largest companies account for more of the index. This can lead to a high concentration in the top 10 names.
RSPN takes a different approach by weighting each holding equally, regardless of size. It also narrows the S&P 500 down to mostly companies in the industrial sector, which amounts to 77 holdings.
RSPN gets an above-average process rating from Morningstar’s research team, largely thanks to its strong long-term risk-adjusted performance. The fund has ranked in the top quartile among its peers over the past three-, five-, 10- and 15-year periods, suggesting the managers have shown skill in their allocation of risk, according to Morningstar’s analysis.
Vanguard S&P 500 ETF (VOO)
VOO is a cousin of the SPDR S&P 500 ETF Trust (SPY), one of the most popular ETFs in the world and the first ever listed in the U.S.
Both ETFs are designed to track the S&P 500 index. Both ETFs are solid options, but the VOO ETF has the slight edge in terms of fees at 0.03% versus 0.0945% for SPY. VOO also earns five stars and a gold badge from Morningstar, whereas SPY gets only four stars and a silver badge, indicating the analysis team has more faith in VOO’s future performance.
iShares Core Aggressive Allocation ETF (AOA)
If you’re going to buy just one ETF from this list and are willing to take a more aggressive stance, AOA is a strong choice. It’s designed to create a diversified portfolio with a higher risk-to-reward potential in a single fund. It does this by holding other iShares funds, such as the iShares Core S&P 500 ETF (IVV).
It provides worldwide exposure, though more than 6% of the portfolio is U.S.-based. The fund also tends to underweight real estate and overweight the Africa and Middle East region compared with other U.S. global allocation funds, according to Morningstar.
Being an aggressive fund, it’s nearly 98% equities, so make sure you have a long-term time horizon if you use it as the core of your portfolio.
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7 of the Best 5-Star ETFs to Buy originally appeared on usnews.com
Update 11/29/23: This story was previously published at an earlier date and has been updated with new information.
