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 more than 3,100 U.S.-based ETFs alone, with combined assets under management, or AUM, worth $8.1 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. All the funds also earn gold badges from Morningstar, indicating the company’s analysts have a high conviction that these funds will outperform an index or most of their peers on a risk-adjusted basis over a market cycle:
| ETF | Expense Ratio |
| Vanguard Information Technology ETF (ticker: VGT) | 0.10% |
| Fidelity MSCI Health Care ETF (FHLC) | 0.084% |
| Invesco S&P 500 Equal Weight Industrials ETF (RSPN) | 0.4% |
| iShares Core S&P 500 ETF (IVV) | 0.03% |
| Vanguard Russell 1000 Growth ETF (VONG) | 0.08% |
| WisdomTree U.S. Quality Dividend Growth ETF (DGRW) | 0.28% |
| FlexShares iBoxx 5-Year Target Duration TIPS ETF (TDTF) | 0.18% |
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. It 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.
“This allows the strategy to capitalize on its low fee, ultimately delivering sound long-term performance on both an absolute and risk-adjusted basis,” writes Morningstar associate analyst Mo’ath Almahasneh.
The fund’s accurate representation of the large-cap U.S. stock universe plus its low fees have allowed it to outperform its peers over the long run, he adds. The fund ranks in the top quartile for performance over the past decade across the entire large blend category.
Fidelity MSCI Health Care ETF (FHLC)
FHLC also tracks an MSCI index, but this time it’s the MSCI USA IMI Health Care Index. This means it should represent the performance of the entire U.S. health care sector.
FHLC’s managers may take liberties with their security selection. While they promise to invest at least 80% of the fund’s assets in index securities, the remaining 20% may be allocated to other health care companies, provided they are similar to ones in the index. Morningstar is bullish on Fidelity’s ability to do this, giving the fund a high process rating based on “the strategy’s effective investment philosophy.”
It currently holds 368 companies. However, don’t let the large number fool you into thinking this is a highly diversified fund. Nearly half of the portfolio is in the top 10 names alone. But if you’re investing in a sector-based fund like FHLC, you’ve already narrowed your bet pretty far. And you’re unlikely to get it for much cheaper.
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 industrials sector, with some crossover into technology, utilities and consumer cyclical companies. This amounts to 81 holdings.
RSPN gets an above-average process rating from Morningstar’s research team. It tends to hold more high quality stocks than its peers. These are companies with consistent profits, growth and solid balance sheets.
This strategy has paid off. The fund has ranked in the top quartile among its peers over the past five-, 10- and 15-year periods.
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iShares Core S&P 500 ETF (IVV)
For a more traditional take on the S&P 500 that sticks to the market cap weighting scheme, IVV is among the best. While it isn’t the most popular S&P 500 ETF — that crown goes to the SPDR S&P 500 ETF Trust (SPY) — it gets the distinction of being the most popular S&P 500 ETF with both a five-star rating and gold badge from Morningstar. SPY gets only four stars and a silver badge, indicating the analysis team has more faith in IVV’s future performance.
This is in part because of IVV’s slight edge in terms of fees at 0.03% versus 0.095% for SPY. IVV accurately “represents the large-cap opportunity set while charging rock-bottom fees, a recipe for success over the long run,” Almahasneh writes. He calls IVV a “best-in-class” choice for large-cap investors.
With nearly $483 billion assets and more than 5 million shares traded each day on average, IVV is a highly liquid way of investing in the hallmark S&P 500.
Vanguard Russell 1000 Growth ETF (VONG)
The Russell 1000 Growth index may not get the same press as the S&P 500, but it may still deserve a place in your portfolio. The index focuses on the large-cap growth segment of the U.S. stock market. It does this by finding the companies within the Russell 1000 index with relatively high metrics, such as sales per share growth over the past five years.
This creates a portfolio of about 440 stocks across all market sectors, but mostly technology at 55.2% of the portfolio. You’ll recognize many top holdings, including Microsoft Corp. (MSFT), Apple Inc. (AAPL) and Nvidia Corp. (NVDA), and many are the same ones you’d find in the S&P 500.
What distinguishes the Russell 1000 from the S&P 500 is the former is willing to accept smaller-size firms while the S&P 500 only holds the largest. That said, both the index and VONG sit squarely in the large-cap growth category. But this has been a good place to be lately, and VONG is one of the best of the best in this sphere. The fund ranked in the top quartile among its peers in terms of performance over the past three-, five- and 10-year periods.
WisdomTree U.S. Quality Dividend Growth ETF (DGRW)
The WisdomTree U.S. Quality Dividend Growth ETF looks for large U.S. stocks that meet certain quality, growth and yield requirements. It does this by tracking WisdomTree’s own U.S. Quality Growth Index, a fundamentally weighted index of dividend-paying growth stocks.
The index starts with the entire U.S. dividend stock universe, then narrows it down to only companies with at least $2 billion in market cap. The remaining stocks are ranked based on long-term earnings expectations and three-year historical average return. It then weights the chosen few based on their projected dividend payouts for the year.
This creates a portfolio of 301 companies with big names like Microsoft, Apple and Broadcom Inc. (AVGO) topping the list.
While it aims to be a dividend fund, its current distribution yield leaves a bit to be desired at 1.6%. It also pays monthly with most distributions coming as ordinary income, meaning you don’t get the long-term capital gains preferential tax treatment.
It looks better from a long-term total return standpoint. The fund ranks in the top quartile among peers over the past 10 years. And according to Morningstar, it has the capacity to do so again in the near term.
FlexShares iBoxx 5-Year Target Duration TIPS ETF (TDTF)
Inflation may be subsiding, but if there is one thing to be learned from the past few years, it’s that one shouldn’t ignore the toll it can take on an investor’s purchasing power. If you still have a wary eye on inflation, TDTF has you covered. It offers an 8.4% 30-day SEC yield by investing in Treasury inflation-protected securities, or TIPS.
TIPS are bonds that adjust their principal based on changes in the consumer price index, or CPI. If the CPI rises, indicating inflation, the principal on TIPS increases proportionately. This means the principal can also fall in times of deflation, but at maturity, you’ll still receive at least the face value back. And between purchase and maturity, TIPS pay interest every six months.
TDTF holds approximately 25 of these bonds with a target duration of five years. Duration is a measure of how sensitive a bond is to changes in interest rates. A five-year duration indicates the price of these bonds would fall by 5% for each 1% rise in interest rates.
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7 of the Best 5-Star ETFs to Buy originally appeared on usnews.com
Update 06/24/24: This story was previously published at an earlier date and has been updated with new information.
