You don’t have to spend hours analyzing specific stocks in an attempt to outperform professional fund managers. Exchange-traded funds, or ETFs, can offer investors exposure to a basket of stocks offered by some of the top investment firms in the business.
You can find ETFs for various portfolio strategies. Some of these funds use popular indexes like the S&P 500 and the Nasdaq-100 as benchmarks and aim to mirror their returns. Investors prioritizing dividends can narrow their search to higher-yield ETFs. If you want to focus on growth instead, it’s possible to find ETFs that consist of growth stocks.
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What Are the Benefits of ETFs?
ETFs make investing more accessible to people who don’t have enough time to research the stock market and discover investment opportunities. Some people prefer to hand off those responsibilities to a portfolio manager and spend their time doing other things.
Kevin Ross, a financial advisor at Cape Securities Inc., outlines the key benefits that ETFs offer to investors: “The advantage of investing in ETFs is that you get professional management and wide diversification, all for an extremely low cost. Studies have shown that most investment strategies do not beat the index and, therefore, why try to do so if the odds are not in your favor?”
Multiple studies, including a study by Rice University business professors Alan Crane and Kevin Crotty, further support the idea that ETFs tracking indexes outperform most actively managed funds when accounting for risk.
What to Look For in an ETF
While index ETFs offer instant portfolio diversification and can help you outperform some active mutual funds, not all of these funds are created equal. Knowing the difference between “good” ETFs and less desirable options can help you make better decisions and feel more confident about your portfolio.
True Tamplin, a certified educator in personal finance and founder of Finance Strategists, offers some suggestions of what to consider before putting your money into an ETF. First up: “At the forefront of considerations for comparing ETFs is the expense ratio, a pivotal metric that directly impacts the investor’s net return,” Tamplin says.
A lower expense ratio allows you to keep more of your returns. It’s possible to find passively managed funds with expense ratios under 0.2%. However, some actively managed funds can have expense ratios closer to 1%. A higher expense ratio means you pay more money to keep your money in the fund, regardless of how the fund actually performs.
Analyzing ETFs doesn’t stop with the expense ratio, however. “Diversification is another cornerstone of ETF selection. An ETF that spans a broad spectrum of sectors, geographic regions or asset classes can offer a buffer against market volatility, thereby mitigating risk while potentially enhancing returns,” Tamplin explains.
Investors can get deeper into their analyses based on what they are looking for in an ETF. These top ETFs, all rated five stars by Morningstar, can jump-start your research:
| ETF | Expense ratio |
| VanEck Semiconductor ETF (ticker: SMH) | 0.35% |
| iShares S&P 100 ETF (OEF) | 0.2% |
| Schwab U.S. Large-Cap Growth ETF (SCHG) | 0.04% |
| Vanguard Russell 1000 Growth Index Fund ETF (VONG) | 0.08% |
| Invesco S&P 500 Top 50 ETF (XLG) | 0.2% |
| iShares U.S. Technology ETF (IYW) | 0.4% |
| Vanguard S&P 500 ETF (VOO) | 0.03% |
VanEck Semiconductor ETF (SMH)
It’s hard to find a fund that has outperformed this one. The VanEck Semiconductor ETF has garnered Morningstar’s five-star rating and has roughly quadrupled over the past five years. Its one-year return is 77.7% by market price, and it has gained 20.3% year to date as of Feb. 26. Its 15-year annualized return is a stellar 25.3%.
The passively managed fund uses the MVIS U.S. Listed Semiconductor 25 Index as its benchmark, and it is diversified within the semiconductor sector but does not offer meaningful exposure to other sectors. You will need to buy additional ETFs for broader diversification.
The VanEck Semiconductor ETF’s top three holdings are Nvidia Corp. (NVDA), Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) and Broadcom Inc. (AVGO). Nvidia represents more than one-quarter of the fund’s total holdings.
SMH has a 0.35% expense ratio, which is on the high side for this list. But then again, this ETF’s returns are on the high side as well.
iShares S&P 100 ETF (OEF)
Many investors have heard of the S&P 500, but fewer people know about the S&P 100. It adheres to the same concept as the S&P 500, but it only holds 100 leading U.S. companies instead of 500 top U.S. companies.
Only offering exposure to 100 companies instead of 500 allows OEF to cut down on many of the less productive companies in the famed S&P 500 index.
The results speak for themselves, as OEF has outperformed the S&P 500 over the past year as well as the past five years. The fund has a five-star Morningstar rating and a reasonable 0.2% expense ratio, and its top three holdings are crowd-pleasers Microsoft Corp. (MSFT) (10.4%), Apple Inc. (AAPL) (9.1%) and Nvidia (6.7%).
Schwab U.S. Large-Cap Growth ETF (SCHG)
Five-star 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 are familiar ones: Microsoft (12.4%), Apple (10.8%) and Nvidia (8%).
SCHG is concentrated heavily in the information technology sector, with almost half of the fund’s total assets in that industry. Consumer discretionary, communication services and health care are the next three categories, each consisting of 12% of the fund’s total assets. More than 80% of the portfolio consists of stocks with market caps above $70 billion.
Vanguard Russell 1000 Growth Index Fund ETF (VONG)
The Vanguard Russell 1000 Growth Index Fund ETF has more than doubled 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. The fund has a 0.08% expense ratio.
VONG has 443 total equity holdings, with more than half of its assets in the technology sector. The fund’s top three picks are, predictably, Microsoft (12.2%), Apple (11.2%) and Nvidia (6%). The remaining Magnificent Seven stocks are all within the fund’s top 10 holdings, which represent 52% of its total assets.
Invesco S&P 500 Top 50 ETF (XLG)
The Invesco S&P 500 Top 50 ETF follows the same concept as the iShares S&P 100 ETF; however, XLG only holds the top 50 stocks in the popular index. This narrow focus has helped the fund outperform both the S&P 500 and the iShares S&P 100 ETF on a regular basis, and it has a 30-day SEC yield of 0.92%.
The fund has more than doubled over the past five years and has a 0.2% expense ratio. Unsurprisingly, XLG’s top three positions are Microsoft (12.4%), Apple (10.8%) and Nvidia (7.9%). The fund has more than 40% of its total assets in the technology sector.
iShares U.S. Technology ETF (IYW)
The iShares U.S. Technology ETF has nearly tripled over the past five years and has a 0.4% expense ratio. This top-performing fund uses the Russell 1000 Technology RIC 22.5/45 Capped Index as its benchmark.
The fund has 133 equity holdings, with the usual trio of Microsoft (16.9%), Apple (15%) and Nvidia (6.7%) in its top spots. While these three stocks have been a common theme, IYW has a larger concentration in Microsoft and Apple than most of the other funds.
The technology sector consumes 84.8% of the fund’s total holdings, with communication services a distant second at 14.9%. Software and services, semiconductors, tech hardware, and media and entertainment are the fund’s dominant subcategories. The combined assets from the remaining sectors make up less than 0.5% of the fund’s total holdings.
Vanguard S&P 500 ETF (VOO)
Some investors want more complex funds that outperform the market index, but others seek out a simpler approach. The Vanguard S&P 500 ETF offers that simplicity, mirroring the returns of the S&P 500. The fund has a low 0.03% expense ratio and a 30-day SEC yield of 1.4%.
The large blend fund has the same top three picks as most of the other funds. However, only 17.6% of the fund’s assets are allocated to Microsoft, Apple and Nvidia combined. As mentioned above, the top-performing iShares U.S. Technology ETF dedicates 16.9% of its capital to Microsoft stock alone.
With 505 equity holdings, VOO has a more diverse portfolio, which makes it more resistant to market volatility. Although other funds have outperformed it, VOO has a respectably high annualized five-year return of 14.5% and a one-year return of 29.7%. With results like that and rock-bottom costs, VOO doesn’t give investors much reason to complain.
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Update 02/27/24: This story was previously published at an earlier date and has been updated with new information.
