Exchange-traded funds 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.
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 like the current one, ETFs can help eliminate the 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.
Top 7 ETFs to buy now
|ETF||Ticker||Assets Under Management (AUM)||Expense Ratio||Description|
|Vanguard S&P 500 ETF||(NYSEMKT:VOO)||$290.9 billion||0.03%||Fund that tracks the S&P 500.|
|Invesco QQQ Trust||(NASDAQ:QQQ)||$170.5 billion||0.2%||Fund that tracks the Nasdaq 100.|
|Vanguard Growth ETF||(NYSEMKT:VUG)||$81.8 billion||0.04%||Invests in large-cap U.S. growth stocks.|
|iShares Core S&P Small-Cap ETF||(NYSEMKT:IJR)||$66.0 billion||0.06%||Fund that tracks the S&P SmallCap 600 Index.|
|iShares Core Dividend Growth ETF||NYSEMKT: DGRO)||$23.6 billion||0.08%||Invests in U.S. stocks focused on dividend growth.|
|Vanguard Total Stock Market ETF||(NYSEMKT:VTI)||$285.3 billion||0.03%||Holds about 4,000 U.S. stocks of all sizes.|
|iShares Core MSCI Total International Stock ETF||(NASDAQ:IXUS)||$31.6 billion||0.07%||Holds about 4,300 international stocks of all sizes.|
1. Vanguard 500 Index Fund
It offers a dirt-cheap expense ratio of just 0.03%. That compares to a 0.78% average expense ratio of similar funds. This lower expense ratio means investors will pay just $3 in annual fees for every $10,000 invested with the fund, versus $78 in a 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 low-cost and large-size combination 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
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 non-financial companies.
The top stocks in the ETF are Apple (AAPL -0.28%), Microsoft (MSFT 0.19%), and Amazon (AMZN 1.3%). It also boasts an affordable expense ratio of 0.2%. It's one of the best-performing ETFs over the past decade. The Investco QQQ Trust has generated a total return of more than 400% (17.6% annually), easily outpacing the S&P 500 at 220% (12.4% annually).
The Nasdaq 100 was in a challenging bear market as of early 2023. However, the Invesco QQQ Trust looks well-positioned to outperform over the longer term since many of its top holdings have a track record of beating the market. Growth stocks also tend to rise faster than the overall market in the early stages of a bull market.
3. Vanguard Growth ETF
Growth stock investors have been licking their wounds for much of the past year. That’s because rising interest rates pressure growth stocks since they make the discount rate rise in financial models.
However, if you're tired of trying to pick a growth stock winner at a time when so few are delivering gains, you may want to invest in the Vanguard Growth ETF, which 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 fund owns many other growth stocks among its roughly 240 holdings.
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 S&P 500 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 600 stocks as of early 2023. It has a fairly low concentration of holdings. Its top 15 holdings made up about 7.5% 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
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-weighed 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 almost 450 dividend stocks as of early 2023.
The ETF offers a relatively attractive dividend yield. As of early 2023, it had a trailing 12-month yield of 2.4%, more than the 1.7% 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
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 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
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 holdings as of early 2023 were:
- Taiwan Semiconductor (TSM 1.49%): The Taiwanese information technology company makes up 1.5% of the fund's holdings.
- Nestle (OTCMKTS:NSRGY): The Swiss consumer staples company comprises 1.2% of the ETF's holdings.
- Novo Nordisk (NVO -3.07%): The Danish healthcare company makes up 1% of the fund's holdings.
- Tencent (OTCMKTS:TCEHY): The Chinese communications company makes up 1% of the ETF's holdings.
- LVMH (LVMUY 2.59%): The French consumer discretionary company comprises 1% of the ETF's holdings.
The fund allows investors to invest globally at an affordable expense ratio of 0.07%. It also has an attractive dividend yield of 2.3% as of early 2023 based on dividend payments over the last 12 months.
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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. These funds 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 don't know 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 FAQs
Can I invest $1,000 in an ETF?
What is a good ETF to buy and hold?
There are many good ETFs to buy and hold. A smart strategy is to buy ETFs with a low ETF expense ratio focused on roughly matching the performance of a stock market index like the S&P 500. A good option is the Vanguard S&P 500 ETF.
Are ETFs a good way to start investing?
ETFs are a good way to start investing. They allow anyone to invest in a broad selection of stocks to instantly build a diversified portfolio. Most ETFs charge a reasonable management fee (expense ratio). That makes them great low-cost investment vehicles for beginners.