Index exchange-traded funds, or ETFs, let you own a broad swath or more specific slice of the market while paying very low fees.
According to brokerage Fidelity, “There are two basic types of indexes: indexes that track the overall market, such as the S&P 500 index, and indexes which track a much more targeted subset of the overall market, such as small-cap growth stocks or large-cap value stocks.”
You’ll also find indexes that track other non-equity assets, such as bonds, commodities and currencies.
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Because there’s no manager actively picking fund components, index ETFs are among the most cost-efficient investments available.
Here’s a look at some popular index ETFs, including what role they could serve in a portfolio:
| Index ETF | Expense Ratio | Role in Portfolio |
| Vanguard S&P 500 ETF (ticker: VOO) | 0.03% | Long-term, low-cost U.S. large-cap exposure |
| iShares Russell 2000 ETF (IWM) | 0.19% | U.S. small-cap complement to S&P 500 stocks, adds growth potential |
| Invesco QQQ Trust (QQQ) | 0.20% | Tech-heavy exposure to innovative companies |
| Vanguard Total Stock Market ETF (VTI) | 0.03% | Broad, low-cost diversification |
| iShares MSCI EAFE ETF (EFA) | 0.32% | Large-cap international stocks, pays a 2.8% yield |
| SPDR S&P MidCap 400 ETF Trust (MDY) | 0.24% | Mid-cap growth with more stability than the smallest stocks |
| iShares MSCI Emerging Markets ETF (EEM) | 0.72% | Higher-risk exposure to emerging markets like China, India, Brazil |
Vanguard S&P 500 ETF (VOO)
With $734 billion in assets under management, VOO, which tracks the large-cap S&P 500 index, is currently the largest ETF on the market. Its low expense ratio of just 0.03% and growing numbers of investors using the Vanguard platform have contributed to this fund’s expansion.
In addition to its low cost, strengths include liquidity, high quality and broad blue-chip coverage, says Arielle Tucker, who serves U.S. expats as founder-partner and cross-border advisor at Connected Financial Planning in Zurich, Switzerland.
When it comes to weaknesses, “Heavy mega-cap tech exposure means it can be top-heavy; it is not a complete market, as it excludes small caps,” she says. “It’s best for long-term investors who want low-cost, set-and-forget U.S. large-cap exposure.”
iShares Russell 2000 ETF (IWM)
To potentially smooth risk, investors can allocate some portfolio dollars into smaller domestic equities. This ETF tracks about 2,000 U.S. small-cap stocks. Its expense ratio is low at 0.19%.
“It’s a simple way to add small-cap exposure, which can diversify a large-cap core holding and provide strong rebounds when the economy is expanding,” says Emilio Cabuto, a financial planner at Verus Capital Partners in San Diego.
“The trade-off is more volatility and sensitivity to credit conditions, so it works best for investors with a long horizon who want to complement their S&P 500 exposure with higher-growth potential,” he adds.
Invesco QQQ Trust (QQQ)
Tracking the Nasdaq-100 index, this ETF tends to be tech-sector heavy. The index deliberately excludes companies in the financial sector, such as banks and asset managers. Financial companies listed on the Nasdaq are tracked separately in the Nasdaq Financial-100 Index.
Pros to this rules-based index include strong exposure to innovative companies and liquidity, Tucker says. She says this ETF works for investors comfortable with growth and tech cyclicality who can handle potentially big price swings.
“Cons are concentrated sector risk and a higher fee, 0.2%, than broad-market Vanguard ETFs,” she says.
Vanguard Total Stock Market ETF (VTI)
VTI offers investors broad, low-cost exposure to virtually the entire U.S. stock market, including large-, mid- and small-cap companies. Advantages include a very low fee of 0.03% and ease of diversification, Tucker says.
However, she adds, “It’s still market-cap weighted, so mega-caps dominate and it has no international exposure. It fits most long-term, hands-off investors seeking broad U.S. equity exposure.”
[Read: 5 Best Currency ETFs to Buy Now]
iShares MSCI EAFE ETF (EFA)
This ETF tracks an index of large-cap stocks in developed markets outside the U.S. “It offers strong diversification across securities, a 10-year return consistent with its index and an attractive yield of 2.82%,” says Nancy Butler, a certified financial planner and founder of Above All Else, Success in Life and Business, based in Waterford, Connecticut.
“This fund may be suitable for an investor looking for exposure to a blend of international large-cap growth and value stocks, a reasonable yield and long-term growth,” she adds.
SPDR S&P MidCap 400 ETF Trust (MDY)
MDY measures the performance of the S&P MidCap 400 Index of U.S. stocks. Its expense ratio is 0.24%. Top sector weightings are in industrials, financials and consumer discretionary. The average market capitalization of its holdings is about $10.1 billion.
“Mid-cap tends to combine some growth potential with more stability than the smallest stocks,” says Linda Jensen, founder of Heart Financial Group in Olympia, Washington.
“Performance historically sits between small-cap and large-cap returns,” she says, adding that mid-caps offer better growth than many large-cap index funds in some cycles, with less volatility than small-caps.
However, mid-caps can underperform in broad market downturns, and may be less stable during recessions, Jensen says.
iShares MSCI Emerging Markets ETF (EEM)
Emerging-market stocks can, in some cycles, outperform developed-market equities. However, that comes with the usual risks associated with currencies and geopolitics. “Still, it’s an easy way to access fast-growing markets abroad, making it a good fit for investors seeking global diversification and comfortable with a bumpier ride,” Cabuto says.
This ETF covers large- and mid-cap companies in developing economies like China, India and Brazil. Cabuto notes that its expense ratio of 0.72% is higher than investors will find with domestic funds. Emerging-market ETFs are typically more expensive because trading, custody and regulatory complexities make these markets costlier to manage than developed markets.
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5 Best S&P 500 Index Funds to Buy Now
7 Best Index ETFs to Buy Now originally appeared on usnews.com
