Use the Kiplinger ETF 20 to build a solid core for your portfolio. Our list also includes funds to explore satellite strategies.
Fly Me to the Moon is a love song, the Frank Sinatra version of which was actually played on the moon by Apollo 11 astronauts. But these days, it might as well be the anthem for investors in exchange-traded funds. Assets in ETFs are growing at an astronomical rate, closing in on $4 trillion in the U.S. That’s still less than the $18 trillion that sits in U.S. mutual funds. But it’s clear that investors are now choosing ETFs over mutual funds. The ETF share of total assets at investment firms has grown to nearly 16% from 8% at the start of the decade, while mutual funds have lost market share. // That’s in part because ETFs are agile. These funds, which are baskets of assets that trade like stocks, are typically index-based and, therefore, low-cost. They offer an efficient way to invest in a broad swath of the market or to zero in on a targeted area. As ETFs evolve, investors are getting smarter about how they use ETFs in their portfolios. “After a decade of market gains, ETFs now play a unique role for investors as the foundation of a portfolio and also as vehicles that enable investors to be nimble,” says Kari Droller, who oversees third-party mutual funds and ETFs at Charles Schwab. // According to a recent vestors are using ETFs to fortify the core of their portfolios. But they’re also using these funds to build satellite holdings that revolve around the core. These bets are more strategic: Short term bond ETFs offer ballast in an uncertain interest rate environment; dividend-stock funds provide income and stability; a health care stock ETF can goose growth.
We follow the same approach with the Kiplinger ETF 20, the list of our favorite ETFs. The roster is diverse. Some are core holdings, and others might satisfy specific needs, such as ballast, income or growth. Some are traditional index funds, which means they track benchmarks that weight holdings by market value (the bigger a stock’s market capitalization, the bigger its position in the index and the ETF portfolio). Others are so-called smart-beta ETFs, which typically track a designer index that is built to do better than a particular pocket of the market. And some of our ETF picks are actively managed. Not all of the Kip ETF 20 are going to be right for you, but the list can come in handy as you build, or round out, your portfolio.
The stock market has had a topsyturvy ride over the past 12 months, but we’re pleased with the performance of our Kip ETF 20 stock funds. Two of our smart-beta ETFs beat Standard & Poor’s 500-stock index: VANGUARD DIVIDEND APPRECIATION and SCHWAB US DIVIDEND EQUITY.
The traditional index ETFs did their job, too. They performed in line with their benchmark, minus expenses. Over the past 12 months, for instance, ISHARES CORE S&P 500, with an expense ratio of 0.04%, returned 9.91%, slightly ahead of the S&P 500’s 9.89% gain.
Our fixed-income ETFs, for the most part, came through, too. Two of the intermediate-term core bond funds are actively managed, but only one—PIMCO ACTIVE BOND—beat the Bloomberg Barclays U.S. Aggregate Bond index. SPDR DOUBLE LINE TOTAL RETURN TACTICAL trailed the Agg by 0.6 percentage point.
We’re making some changes to the roster this year. Some of the newcomers are meant to cushion your portfolio in a market downturn. One new entrant is simply a better strategy for investing in small-company stocks; another is a way to buy into some of the most innovative trends of our time. Read on for details on which ETFs are moving in, and which ones are moving out to make room. Also, we share our tips for trading ETFs in the box below. You’ll find four sample portfolios using ETF 20 funds on page 22. Returns and data are through July 12.
What’s in: ISHARES EDGE MSCI MIN VOL USA ETF, an ETF that holds up well in rocky markets (Min Vol stands for minimum volatility). The ETF tilts toward stocks of steadier large and midsize U.S. companies. “By reducing overall volatility, the fund delivers market-like returns with lower risk,” says Holly Framsted, head of smart-beta ETFs for BlackRock’s iShares. Over the past five years, iShares Edge MSCI Min Vol was 22% less jumpy than the S&P 500, and it beat the benchmark by an average of 2.2 percentage points per year with a 13.4% annualized return.
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