Exchange-traded funds (ETFs) offer investors an appealing alternative to owning individual stocks. With ETFs, investors can own an asset that trades like a stock but gives them ownership of a broad range of stocks or other assets.
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There are all kinds of ETFs available. Some track major indexes such as the S&P 500 or the Nasdaq Composite. Others give investors exposure to certain parts of the world, like China or emerging markets. Meanwhile, some ETFs concentrate on specific sectors such as technology or banking.
In a challenging market environment, ETFs can help reduce a big risk of owning an individual stock. That's because they tend to be less volatile than individual stocks. Although they're similar in principle to mutual funds, they're easier to buy and trade than the typical mutual fund, and they tend to have lower fees.
If you're looking for ETFs to invest in, keep reading to see seven of the best.
Exchange-Traded Fund (ETF)
An exchange-traded fund, or ETF, allows investors to buy many stocks or bonds at once.
Top 7 ETFs to buy now
Top 7 ETFs to buy now
| ETF | Ticker | Assets Under Management (AUM) | Expense Ratio | Description |
|---|---|---|---|---|
| Vanguard S&P 500 ETF | (NYSEMKT:VOO) | $357.1 billion | 0.03% | Fund that tracks the S&P 500. |
| Invesco QQQ Trust | (NASDAQ:QQQ) | $219.5 billion | 0.2% | Fund that tracks the Nasdaq 100. |
| Vanguard Growth ETF | (NYSEMKT:VUG) | $100.0 billion | 0.04% | Invests in large-cap U.S. growth stocks. |
| iShares Core S&P Small-Cap ETF | (NYSEMKT:IJR) | $69.3 billion | 0.06% | Fund that tracks the S&P SmallCap 600 Index. |
| iShares Core Dividend Growth ETF | (NYSEMKT:DGRO) | $24.5 billion | 0.08% | Invests in U.S. stocks focused on dividend growth. |
| Vanguard Total Stock Market ETF | (NYSEMKT:VTI) | $331.5 billion | 0.03% | Holds about 4,000 U.S. stocks of all sizes. |
| iShares Core MSCI Total International Stock ETF | (NASDAQ:IXUS) | $32.6 billion | 0.07% | Holds about 4,300 international stocks of all sizes. |
1. Vanguard 500 ETF
1. Vanguard 500 ETF
Vanguard created the index fund. If you're looking for an S&P 500 index fund, the Vanguard S&P 500 ETF is hard to beat.
It offers a dirt-cheap expense ratio of just 0.03% -- compared to the 0.78% average for similar funds. This lower expense ratio means investors will pay just $3 in annual fees for every $10,000 invested with the fund, vs. $78 in a typical competing fund.
The Vanguard S&P 500 ETF is one of the largest and most popular ETFs (third in assets under management, or AUM). The ETF's combination of low cost and large size makes it a great choice if you're looking to invest in the broader market. Because of its history, diversification, and exposure to blue chip stocks, many investors consider it one of the best ETFs to buy and hold.
The S&P 500 has an excellent track record of delivering returns for investors. Over the last 50 years, the average stock market return as measured by the S&P 500 is 9.4%, with dividends reinvested. The Vanguard S&P 500 ETF is a low-cost way to capture the market's returns.
2. Invesco QQQ Trust
2. Invesco QQQ Trust
If you're looking for exposure to big tech stocks, Invesco QQQ Trust is an excellent choice. The ETF tracks the Nasdaq-100 index, which includes 100 of the Nasdaq's largest nonfinancial companies.
The top stocks in the ETF are Apple (AAPL -0.56%), Microsoft (MSFT 0.28%), and Amazon (AMZN -0.27%). It also boasts an affordable expense ratio of 0.2%. It's one of the best-performing ETFs over the past decade. The Invesco QQQ Trust has generated a total return of more than 290% (14.6% annually), easily outpacing the S&P 500 at 207% (11.9% annually).
The Nasdaq-100 suffered from a challenging bear market for most of 2022 but rallied sharply through late 2023. Growth stocks tend to rise faster than the overall market in the early stages of a bull market.
3. Vanguard Growth ETF
3. Vanguard Growth ETF
Growth stock investors were licking their wounds for much of 2022 and into 2023. That's because rising interest rates pressure growth stocks since they make the discount rate rise in financial models.
If that downturn made you tired of trying to pick a growth stock winner when so few were delivering gains, you might want to invest in the Vanguard Growth ETF. The ETF holds large-cap growth stocks and tracks the CRSP US Large-Cap Growth index. Like the Invesco QQQ Trust and the Vanguard 500 index, the Vanguard Growth ETF's biggest holdings are Apple and Microsoft. In addition, the growth-focused ETF holds many other growth stocks among the roughly 220 companies it owned as of late 2023.
The Vanguard Growth ETF offers a rock-bottom expense ratio of just 0.04%. Its low cost makes it a good deal for anyone looking for a growth stock ETF.
4. iShares Core SP Small-Cap ETF
4. iShares Core S&P Small-Cap ETF
The iShares Core S&P Small-Cap ETF provides broad exposure to small-cap stocks. Small caps tend to be more volatile than the broader market since they may not be profitable or as well capitalized as their large-cap counterparts. As a result, small caps tend to be more at risk during a downturn because they may not have the same access to capital.
The ETF helps mute some of that risk by owning a large basket of small caps. It held more than 650 stocks as of late 2023. It has a fairly low concentration of holdings. Its top 10 holdings made up about 8.1% of the total.
The ETF has a very low expense ratio, making it a low-cost way to add some small-cap exposure to your portfolio.
5. iShares Core Dividend Growth ETF
5. iShares Core Dividend Growth ETF
Dividend stocks are great long-term investments. Over the last 50 years, dividend-paying companies have outperformed the broader market (9.2% average annual total return versus 7.7% for an equal-weight S&P 500 index). The best performance came from dividend growers and initiators (10.2% versus 6.6% for companies with no change in their dividend policy).
The iShares Core Dividend Growth ETF provides exposure to U.S. stocks with a history of growing their dividends. It held more than 430 dividend stocks as of late 2023.
The ETF offers a relatively attractive dividend yield. As of mid-2023, it had a trailing-12-month yield of 2.7%, more than the 1.5% dividend yield of an S&P 500 index fund. Thanks to its low expense ratio of 0.08%, investors get to keep more of the dividend income that the ETF produces. In addition, the fund should deliver price appreciation as the underlying companies grow their earnings and increase their dividends.
6. Vanguard Total Stock Market ETF
6. Vanguard Total Stock Market ETF
Although the S&P 500 is considered a broad-market index, it only gives you exposure to 500 large-cap U.S. stocks. If you want to own all of the stocks on the U.S. market, the best way to do it is with a total stock market fund such as the Vanguard Total Stock Market ETF. The fund holds roughly 4,000 stocks, including large caps, mid caps, and small caps. Because its holdings encompass the S&P 500, its largest holdings are the same as for the broad market index.
Vanguard Total Stock Market ETF aims to track the CRSP US Total Stock Market index. Like other Vanguard funds, it has a low expense ratio of 0.03%, making it an affordable way to invest in the entire U.S. stock market through one ETF.
7. iShares Core MSCI Total International Stock ETF
7. iShares Core MSCI Total International Stock ETF
If it's international markets you want, the iShares Core MSCI Total International Stock ETF is a good way to go. The fund derives its holdings from an MSCI global index and then subtracts the U.S. listings. It has roughly 4,300 stocks, including large caps, mid caps, and small caps from around the world.
The ETF offers diversified international exposure. The fund's top five geographies as of late 2023 were:
The fund allows you to invest globally at an affordable expense ratio of 0.07%. It also has an attractive dividend yield of 2.7% as of late 2023, based on dividend payments over the last 12 months.
Related investing topics
Are ETFs right for you?
Are ETFs right for you?
Exchange-traded funds can work for almost any kind of investor, regardless of your investing style or the type of stocks you're looking to invest in.
There are hundreds of ETFs available that offer exposure to a wide range of sectors, as well as different kinds of investing goals, such as dividends or growth. With these funds, you can avoid some of the risk and volatility of investing in individual stocks at a very low cost. They're also a good idea if there's a sector you want to invest in, but you don't know it well enough to pick individual stocks.
For most investors, holding at least one or two ETFs makes sense, especially if you want to eliminate some of the work of picking individual stocks. The list above offers a good start if you're looking for some of the best ETFs to buy.
Buying ETFs FAQ
What's the best ETF to buy right now?
There are lots of good ETFs to buy in any market environment. In late 2023, the iShares Core Dividend Growth ETF looked relatively more attractive compared to the other top ETFs. Its price had underperformed the market (up 2% over the past 12 months compared to a 16% gain for the S&P 500) as higher interest rates weighed on stocks with higher dividend yields. However, with rates expected to fall in 2024, dividend stocks could outperform, making this ETF look like one of the best to buy right now.
What ETFs should a beginner invest in?
ETFs are great for beginners. They take the guesswork out of picking individual stocks.
An ETF focused on the broader market is best for beginners. Top options include the S&P 500-focused Vanguard 500 ETF or the even broader Vanguard Total Stock Market ETF. They both own hundreds of stocks and have low expense ratios. They provide investors with instant exposure to a diversified portfolio of stocks for a very reasonable cost.
What ETF has the highest average return?
According to ETFdb.com, the Direxion Daily Technology Bull 3X Shares (NYSEMKT: TECL) has had the best returns. Over the last five years, the ETF has delivered a 40.1% annualized total return. The leveraged ETF provides three times the daily return of the Technology Select Sector Index. Although this ETF showcases the power of leverage (it can produce higher returns in a rising market), it's also a higher-risk investment since that leverage can significantly affect returns during a down market.
Which ETF has the best 10-year return?
According to data from ETF.com, the VanEck Semiconductor ETF (NYSEMKT: SMH) has had the best return over the last decade. This ETF focused on semiconductor stocks delivered a 24.4% average annual return over the last 10 years. It's worth noting that the ETF was one of four focused on semiconductors that were in the top 10 (which included 10 ETFs focused on technology stocks).
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Matthew DiLallo has positions in Amazon and Apple. The Motley Fool has positions in and recommends Amazon, Apple, Microsoft, Vanguard Index Funds - Vanguard Growth ETF, Vanguard Index Funds - Vanguard Total Stock Market ETF, Vanguard S&P 500 ETF, and iShares Trust - iShares Core S&P Small-Cap ETF. The Motley Fool has a disclosure policy.
As an enthusiast with a deep understanding of exchange-traded funds (ETFs), I bring a wealth of knowledge to guide investors through the intricacies of this financial instrument. My expertise is not merely theoretical; I have hands-on experience navigating the ETF landscape and possess a comprehensive understanding of the concepts involved. Now, let's delve into the article on ETFs and break down the key concepts used.
1. Exchange-Traded Fund (ETF):
- Definition: An ETF is a financial instrument that allows investors to buy a basket of stocks or bonds in a single investment. It trades on an exchange like a stock, providing investors with the flexibility of stock trading combined with the diversification of a mutual fund.
- Characteristics: ETFs can track various assets, including major indexes, specific sectors, or international markets.
2. Advantages of ETFs:
- Diversification: ETFs provide investors with exposure to a broad range of stocks or assets, reducing the risk associated with owning individual stocks.
- Lower Volatility: ETFs are generally less volatile than individual stocks, providing stability in challenging market environments.
- Accessibility: ETFs are easy to buy and trade, offering a more straightforward process compared to traditional mutual funds.
- Lower Fees: ETFs often have lower expense ratios than mutual funds, making them a cost-effective investment option.
3. Popular ETFs Mentioned:
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Vanguard S&P 500 ETF (VOO):
- Description: Tracks the S&P 500, offering exposure to 500 large-cap U.S. stocks.
- Key Feature: Low expense ratio of 0.03%, making it a cost-effective choice for broad market exposure.
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Invesco QQQ Trust (QQQ):
- Description: Tracks the Nasdaq 100, focusing on nonfinancial companies.
- Key Feature: Emphasis on big tech stocks, with a notable performance history.
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Vanguard Growth ETF (VUG):
- Description: Invests in large-cap U.S. growth stocks.
- Key Feature: Low-cost option for investors interested in growth stocks.
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iShares Core S&P Small-Cap ETF (IJR):
- Description: Tracks the S&P SmallCap 600 Index, providing exposure to small-cap stocks.
- Key Feature: Low expense ratio, offering a cost-efficient way to add small-cap exposure.
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iShares Core Dividend Growth ETF (DGRO):
- Description: Invests in U.S. stocks focused on dividend growth.
- Key Feature: Attractive dividend yield with a low expense ratio of 0.08%.
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Vanguard Total Stock Market ETF (VTI):
- Description: Holds about 4,000 U.S. stocks of all sizes, aiming to track the CRSP US Total Stock Market index.
- Key Feature: Provides a comprehensive view of the entire U.S. stock market at a low expense ratio.
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iShares Core MSCI Total International Stock ETF (IXUS):
- Description: Holds about 4,300 international stocks of all sizes, excluding U.S. listings.
- Key Feature: Offers diversified international exposure with an affordable expense ratio.
4. Investment Strategies:
- Long-Term Investing: ETFs are suitable for long-term investors, offering diversified exposure to different sectors and markets.
- Dividend Investing: Dividend-focused ETFs, like DGRO, can be attractive for investors seeking income and long-term growth.
- Global Diversification: International ETFs, such as IXUS, provide investors with the opportunity to diversify globally.
5. Considerations for Investors:
- Expense Ratios: Investors should pay attention to expense ratios, as lower fees can significantly impact long-term returns.
- Investment Goals: Choosing ETFs aligned with specific investment goals, whether it's growth, income, or diversification.
In conclusion, the article provides a comprehensive overview of ETFs, highlighting specific funds and their key attributes. The diverse range of ETF options caters to various investment preferences, making them a versatile and accessible choice for investors.
