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 mostly 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. 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.
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.
Stephen Kates, a certified financial planner and principal financial analyst for Annuity.org, offers some factors to keep in mind when researching ETFs: “Investors should pay attention to a variety of details within an ETF. Especially when comparing index ETFs, which all track the same index, details such as expense ratio, tracking error, and dividends or distribution yield are relevant markers for choosing the best option.”
He adds, “When it comes to actively managed ETFs, it is worthwhile to be mindful of the concentration risk of the underlying portfolio.”
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.
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. Each of these ETFs has also outperformed the S&P 500’s 11.2% return year to date and its 13.4% annualized return over the past five years as of May 24:
| ETF | Expense ratio | 10-year annualized return* |
| VanEck Semiconductor ETF (SMH) | 0.35% | 28.1% |
| iShares S&P 100 ETF (OEF) | 0.20% | 13.5% |
| Schwab U.S. Large-Cap Growth ETF (SCHG) | 0.04% | 16.0% |
| Vanguard Russell 1000 Growth Index Fund ETF (VONG) | 0.08% | 15.9% |
| Invesco S&P 500 Top 50 ETF (XLG) | 0.20% | 14.5% |
| iShares U.S. Technology ETF (IYW) | 0.40% | 20.6% |
| Vanguard Information Technology ETF (VGT) | 0.10% | 20.6% |
*Based on market price as of May 24.
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 roughly quadrupled over the past five years, as its large Nvidia Corp. (NVDA) position has boosted it to new heights. Nvidia makes up more than 22% of the VanEck Semiconductor ETF’s total assets, in a position worth $4.7 billion as of May 25. Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) and Broadcom Inc. (AVGO) also make up a combined 20% of the fund’s positions. So SMH shareholders end up with three stocks that make up more than 42% of total assets, but the portfolio has worked for short- and long-term investors.
SMH has a five-year annualized return of nearly 40%. It’s also up by more than 90% by net asset value over the past year. Over 10 years, SMH has returned an astounding 28% annualized.
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 cap. You’ll find most of the Magnificent Seven stocks jostling for the top 10 positions within the fund, although Tesla Inc. (TSLA) has dropped to 13th place. These stocks make up more than 40% of the fund’s total holdings.
OEF has a five-year annualized return of 16.8%. 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 won’t get much exposure to utilities (1.1%), materials (0.8%) or real estate (0.4%).
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 are familiar ones: Microsoft Corp. (MSFT) (12.4%), Apple Inc. (AAPL) (10.7%) and Nvidia (10.2%).
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.”
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.
Although VONG has 440 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. Microsoft, Apple and Nvidia make up roughly 30% of the fund’s total assets.
Long-term investors have enjoyed an annualized return of 19.1% over the past five years.
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 Microsoft, Apple and Nvidia. A strong concentration in the Magnificent Seven stocks has been a boon for investors. XLG has an annualized return of 17.9% 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.
iShares U.S. Technology ETF (IYW)
The iShares U.S. Technology ETF has 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 131 equity holdings, with the usual trio of Microsoft (17.8%), Apple (15.5%) and Nvidia (14.3%) in its top spots. While these three stocks are common themes, IYW has a larger concentration in Microsoft and Apple than most of the other funds.
IYW has a five-year annualized return of 25.3%. Its annualized return remains at about 20% even when looking at 10-year and 15-year results.
Vanguard Information Technology ETF (VGT)
The Vanguard Information Technology ETF consists of 313 equity holdings with a large focus on the Magnificent Seven stocks. The firm also has outsized exposure to Microsoft (17.3%), Apple (15.3%) and Nvidia (11.9%), but not quite as dramatic as IYW’s allotment. The five-star tech index fund has a low 0.1% expense ratio and a trailing-12-month yield of 0.7%.
VGT has comfortably outpaced the S&P 500 and has an annualized return of 23.5% over the past five years. The fund is also up 39.6% by net asset value over the past year. The Vanguard Information Technology ETF has a 15-year annualized NAV return of 20.4%.
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Update 05/28/24: This story was previously published at an earlier date and has been updated with new information.
