I’m of the view that passive and active investors alike can find value in owning exchange-traded funds (ETFs). Because there are more ETFs on the market today than individual stocks, there’s a fund for every kind of investor.
These highly diversified investing vehicles allow investors to purchase a stake in a wide range of companies, with portfolios that are automatically rebalanced based on certain criteria. The upside for investors is that they often are charged only a few basis points for the portfolio creation and rebalancing/turnover activity that takes place within these ETFs. Indeed, thinking back to the 1980s and 1990s where fund managers would often charge much higher fees for such services, that’s an overall win for the investing public.
Why? Well, compounding one’s returns year after year is great, but fees can eat into a significant percentage of overall gains in the long run. Thus, such funds allow for excellent portfolio diversification and risk management at a rock-bottom cost, and that’s a factor that’s led to trillions of dollars flowing into such ETFs today.
Of course, the question is which ETFs are the best options for investors to consider right now? Here are my three top picks, personally.
Vanguard Utilities Index Fund ETF (VPU)
I think the utilities sector is among the top spaces investors should be honing in on right now. In this space, the Vanguard Utilities Index Fund ETF (VPU) is one of the best such options for those looking to invest in this sector, but don’t know where to start.
This ETF tracks the entire utilities sector, deriving all of its revenue and earnings from companies providing electricity and natural gas utilities to commercial and residential customers in various locales. As such, for investors looking to take a bite out of the AI trade, and who believe investing in the back-end power generation capacity required to support next-generation chips and the compute required to power these applications, this would certainly be the direction I’d go in.
I think the utilities sector is one that actually could be among the biggest long-term winners from the rise of AI, electrification trends more broadly, and technology usage. As we consume more data and compute, utilities companies which already have strong and stable balance sheets could outperform by a wider margin.
With a current
and an expense ratio under 10 basis points (currently 0.09%), I think VPU is among the best options in the market right now for long-term investors looking for solid total returns.
Vanguard Total Stock Market Index ETF (VTI)
Owning U.S. stocks is great for long-term investors, and that’s certainly been a winning strategy for most of recent history. For investors looking for broader exposure to a mix of U.S. stocks, the Vanguard Total Stock Market Index ETF (VTI) can be an excellent option.
This ETF tracks the entire universe of U.S.-traded stocks. What this means is that unlike other index funds, which may focus on the S&P 500 (and the 500 largest U.S. companies) or other indexes which are limited in their exposure to small and mid-sized companies, VTI gives investors a piece of the entire universe of investable equity assets in the U.S.
In my view, from a diversification perspective, there’s no other better option in the ETF world right now. That’s a big statement, but I stand by it.
Currently providing a dividend yield of 1.1%, investors clearly aren’t going to get any sort of meaningful yield over the long-term by investing in this ETF. That said, those seeking growth and long-term capital appreciation can benefit from a higher allocation to small and mid cap stocks. I’m of the belief that returns will ultimately revert toward their longer-term mean, meaning VTI could outperform other index funds if this is the case.
With an expense ratio of just 0.03%, there’s no cheaper ETF out there to gain exposure to this kind of diversification.
iShares 20+ Year Treasury Bond ETF (TLT)
In terms of portfolio diversification, let’s not forget about the value bonds can provide, shall we?
The iShares 20+ Year Treasury Bond ETF (TLT) remains one of my top picks in the ETF world for investors looking for fixed income exposure. That’s personally because I believe that the 40-year long decline we’ve seen in interest rates (with rates trending toward zero) is one that will likely remain sticky for some time.
Sure, there are plenty of concerns around inflation, and those concerns are real. But I’d argue that having at least some allocation to bonds is a winning strategy, particularly for those bullish on yields coming lower over time.
Regardless of your view on the overall economy, most financial experts and academics in the world of finance note the superior risk-adjusted returns of portfolios that have some allocation to bonds. I’m of the view that this inherent safety net bonds provides makes a fund like TLT worth considering.
And importantly, given the Fed’s recent interest rate hiking cycle, TLT now provides a juicy yield of around 4.3% at an expense ratio of just 0.15%. That’s a return and cost profile I like, and I think TLT can have a place in any investor’s portfolio right now.