ETFs have revolutionized the way we invest. With their low
cost, ease of trading, tax-efficiency and transparency, they have
surged in popularity in recent years. There are currently 1,567
exchange traded products listed in the U.S., with almost $1.7
trillion in assets under management.
ETFs now represent
of all trading in the market. There are some ETFs that are
suitable for short-term market timing strategies. At the same
time, there are a number of excellent ETF options for long-term,
buy-and-hold investors. (Read: B
est ETF Strategies for 2014
What should investors consider before investing in ETFs for
long-term? Here are some factors investors should look at for
narrowing down to the best ETFs, of course in addition to their
Are Cheaper Funds Better?
Expense ratios are an important factor in the return of an ETF
and in the long-term, cheaper funds can significantly outperform
their more expensive cousins, other things remaining the same.
3 Biggest Mistakes of ETF Investing
The difference in total returns between high cost and low cost
ETFs (after deducting expenses) becomes very significant as we
increase the holding period. In additon to expense ratios,
investors should also look at trading costs but they are not so
significant for buy-and-hold investments.
What Index does the ETF track?
Make sure that the index the ETF tracks is simple and
transparent. You may want to avoid ETFs tracking exotic indexes
or risky strategies, unless you are a professional trader.
Similarly, ETFs with a very narrow focus-such as livestock
futures-are not meant for long-term investors.
Issuer and Assets under Management
Low AUM is often one of the reasons for fund closure. Generally
ETFs with less than $50 million in assets are not profitable
enough for their sponsors.
Similarly, investors should look at the sponsor too. An ETF
issued by a strong, profitable sponsor is less likely to shut
Inverse and Leveraged ETFs
They offer some excellent options for market timing and hedging
but they are not suitable for long-term holding. Similarly ETFs
that track futures contracts are not meant for buy-and-hold
investors due to issues like contango. (Read:
3 Niche ETFs that will keep flying
Below we have highlighted 3 excellent ETFs that are excellent for
Watch Your capital Grow with Vanguard Dividend
Dividend stocks and ETFs have experienced some headwinds since
the start of taper talk, but investors need to remember that
dividends have accounted for more than 40% of the total returns
from the market over a long time horizon and thus they should be
a part of any long-term investment portfolio.
Further dividend payments are expected to continue to increase in
the coming months as most large US companies have huge cash piles
on their balance sheet and are in a position to increase payouts
However, in my view, ETFs that hold stocks with a high dividend
growth potential have much better outlook compared with ETFs that
focus on high dividend yielding stocks. Most high-yield ETFs
focus on sectors that are likely to underperform in the rising
VIG holds large high quality companies that have a record of
increasing dividends for at least 10 years.
Current top holdings include Abbott Labs, PepsiCo, Proctor&
Gamble and Coca-Cola. With its current strong focus on cyclical
sectors like consumer goods/services industrials and energy, this
ETF is poised to do well if the economy in general and labor
markets in particular continue to improve. It has miniscule
exposure to rate sensitive sectors like Utilities and Telecom.
With an expense ratio of 0.10%, this is one of the cheapest funds
in this space. The dividend yield at 2.2% is not remarkable, but
this fund is better suited for investors who seek long-term
capital appreciation along with income and not just high current
The ETF made its debut way back in 2006 and now manages more than
$23 billion in assets.
VIG is a Zacks Rank #2 (Buy) ETF.
Invest like Warren Buffet with Market Vectors Wide Moat
The term "economic moat" was popularized by Warren Buffet who
said that he seeks "economic castles protected by unbreachable
'moats'." In simple words moat is a unique competitive advantage
that allows a company to outperform others in the same industry
Thanks to MOAT, investors can now own a diversified group of such
potential winners. Launched in April 2012, MOAT now has $600
million in assets which are invested in equal-weighted exposure
in 20 least-expensive wide-moat companies. These are mostly
large-cap companies with sustainable competitive advantage in
their respective industries.
MOAT has highest allocation to technology sector (25%), followed
by healthcare (21%) and energy (15%). With an expense ratio of 49
basis points, this product is expensive compared with two others
on this list, but with its excellent investment strategy, it is
poised to deliver solid returns to investors.
The index strategy has worked in the longer term. In five years
through December 2013, the Moat index had an average annual
return of 22.72% versus 17.94% for the S&P index. The ETF has
also beaten the broader market since inception.
Enjoy Value Premium with Schwab U.S. Large-Cap Value
Numerous academic studies have shown that value stocks have
delivered higher returns with lower volatility compared with
growth stocks over the long term in almost all the markets
studied. Given their proven performance over long term, value
stocks and funds should be a predominant part of any 'core'
SCHV provides broad exposure to large-cap U.S. stocks with value
style characteristics. Launched in December 2009, the fund has so
far been able to attract assets worth $810 million, which are
invested in 359 holdings.
With an annual fee of just 7 basis points, this product is the
cheapest option in the large-cap value space. Additionally, the
dividend yield at 2.3% is quite attractive. Financials (24%),
Consumer Staples (11%), Energy (11%) and Consumer Discretionary
(11%) are the top four sectors, the fund has invested in.
SCHV is a Zacks Rank #2 (Buy) ETF.
Investment advisers often warn--"don't fall in love with a
stock". Does that apply to ETFs as well? Usually not, since ETFs
with their diversified holdings eliminate company-specific risk
to a large extent.
ETFs discussed above are excellent options for buy-and-hold
investors. There is nothing not to love about them.
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MKT VEC-WIDE MT (MOAT): ETF Research Reports
SCHWAB-US LCV (SCHV): ETF Research Reports
VANGD-DIV APPRC (VIG): ETF Research Reports
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