Don’t Pick a Stock, Pick the Market: 5 Top ETFs to Consider
For most people, picking stocks is a fool’s game, something best left to those with a generous appetite for risk. Even most hedge fund managers, whose primary job is to identify winners and losers in the stock market, have a hard time beating the market. In 2013, for example, hedge funds returned an average of 7.4 percent for the year, according to Bloomberg, 23 percentage points behind the S&P 500.
To the credit of hedge fund managers, the S&P 500 had a phenomenal year. Hedge funds tend to shine when equity headwinds are howling, and the exact opposite has been happening ever since the Federal Reserve opened the throttle on quantitative easing. Hedge funds have underperformed the S&P 500 for each of the past five years, while many of those who have made aggressive and bullish bets on equities have profited enormously.
But most investors don’t have the time of day to develop a competent bullish investment strategy during a bull market or a savvy hedging strategy during a bear market. Most mom and pop investors, who are saving for retirement or a college education, are best off taking the advice of Warren Buffett, chairman and CEO of Berkshire Hathaway (NYSE:BRKA)(NYSE:BRKB): Own a slice of the market and invest in exchange-traded funds (ETFs). The famous investor has endorsed a strategy of maintaining a simple portfolio full of inexpensive index funds and said that some, if not much, of his own estate will be invested this way.
Here’s an overview of five popular ETFs that most investors should consider.
1. SPDR Gold Shares Trust (NYSEARCA:GLD)
The SPDR Gold Shares Trust is a good middle ground for those who want to diversify into gold but don’t like the idea of burying it in their backyard. The trust has a simple objective: Replicate the performance of gold bullion — net expenses, of course. On that note, though, State Street Advisors, which manages and markets the trust, charges annual expenses of just 0.4 percent, which is relatively low compared to an average expense ratio of about 0.76 percent among other gold ETFs.
Started in 2004 and with total net assets of $34.6 billion, State Street’s SPDR Gold Shares Trust is one of the oldest and largest gold ETFs out there. The fund is both fairly transparent and liquid, and is (of course) backed by physical gold, which is kept in a vault in London.
The fund’s performance since its inception has been, well, let’s call it interesting, at least. Having suffered the vagaries of the recession, recovery, and the 112th and 113th Congresses, the fund is up just 12.12 percent since November 2004. Complicated (and sometimes convoluted) fiscal and monetary policy have alternatively been headwinds and tailwinds for the commodity. The fund is up 10 percent this year to date but down 16.8 percent on the year (as of the end of February).
2. Vanguard Russell 1000 Index ETF (NASDAQ:VONE)
Have you ever had a craving to own a slice of 1,000 of the largest publicly traded companies in the U.S.? If so, you can satisfy that craving for about $86.10, the market price of the Vanguard Russell 1000 Index ETF as of March 25.
As the name implies, the Vanguard Russell 1000 Index ETF seeks to replicate the performance of the Russell 1000 Index by owning the same companies in the same weight. The Russell 1000 Index is comprised of large-cap stocks that represent approximately 92 percent of the total U.S. market. “The Russell 1000 Index is constructed to provide a comprehensive and unbiased barometer for the large-cap segment and is completely reconstituted annually to ensure new and growing equities are reflected,” according to the Russell Investments, which manages the index.
Vanguard’s Russell 1000 Index ETF has an expense ratio of just 0.12 percent, which is 89 percent lower than the average expense ratio of funds with similar holdings, according to Vanguard. The performance of this broad slice of equities tends be similar to the movement of the S&P 500. The ETF has posted average annual returns of about 18.47 percent since its inception in September 2010. According to Vanguard, $10,000 invested in the ETF at inception would now be worth $17,674.
The ETF’s largest holdings include Apple (NASDAQ:AAPL), Exxon Mobil (NYSE:XOM), Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), and General Electric (NYSE:GE). The size of these companies gives them a large weight in the index, which means they have a lot of representation in the ETF.
3. iShares Core S&P Total US Stock Mkt (NYSEARCA:ITOT)
Like most ETFS named after an index, the iShares Core S&P Total US Stock Market ETF seeks to roughly replicate the performance of the underlying index. In this case, the underlying index is the S&P 1500, and index maintained by S&P Dow Jones Indices (NYSE:MHFI). The S&P 1500 is comprised of the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600. Like the Russell 1000 index, the S&P 1500 is intended to be representative of the broader market and is useful as a benchmark.
As of March 25, the fund had more than $1.1 billion total assets, 13.6 million shares outstanding, and charged an expense fee of just 0.07 percent. Over the past five years, the fund has posted average annualized returns of 18.19 percent, slightly less than the Vanguard Russell 1000 index. Top holdings of the iShares ETF include Apple, Microsoft, Google, Exxon Mobil, and General Electric. The ETF is managed by BlackRock (NYSE:BLK).
4. iShares Dow Jones US (NYSEARCA:IYY)
The iShares Dow Jones ETF is a shortcut to owning the Dow Jones Industrials. The ETF is designed to track the performance of the Dow for an expense ratio of 0.2 percent. Whether that’s worth the cost for you is up for debate, but with total assets of $882 million, there are plenty of investors willing to pay for the service. The fund has averaged an annual return of 4.15 percent since its inception in June 2000, compared to 4.35 percent for the index.
5. SPDR S&P Dividend ETF (NYSEARCA:SDY)
If dividends are your thing (and really, who doesn’t like a good dividend?) then the SPDR S&P Dividend ETF may be for you. The ETF selects certain companies with large dividend yields from the S&P High Yield Dividend Aristocrats Index and currently has 97 holdings. Top holdings include AT&T (NYSE:T), HCP (NYSE:HCP), Consolidated Edison (NYSE:ED), AbbVie (NYSE:ABBV), and Sysco Corp. (NYSE:SYY)
The ETF, run by State Street, has a gross expense ratio of 0.35 percent and has a dividend yield of 2.3 percent as of March 25. The fund was created in 2005 and has had an average annualized return of 7.84 percent since then.