Exchange-traded funds are now expected to grow assets under management by almost double to an incredible $6 trillion by 2020, according to research by professional services firm EY. ETFs provide investors with low-cost access to many asset classes that can not only introduce portfolio diversification benefits, but also offer higher expected returns.
By crunching data gathered from our Nasdaq Smart Portfolio, we found the three most popular ETFs for Portfolio investors right now. Let’s take a quick look at how the market’s hottest ETFs shape up:
1.SPDR S&P 500 ETF (SPY): This is the most popular ETF for professional investors and the most widely held ETF across the Nasdaq Smart Portfolios. In effect, you are buying the whole market with just one click as SPY tracks the S&P 500 i.e. the 500 biggest US-listed stocks, and is weighted to reflect the market cap of these stocks. Trading near its 52-week high of $242, the price of the ETF has been slowly and steadily rising since its inception back in 1993.
Even the Oracle of Omaha himself Warren Buffett has given the index his seal of approval. He famously bet $1 million against Protege Partners that over a 10-year period starting in 2008 that the S&P 500 will outperform a portfolio of hedge fund firms; the bet ends at the end of this year and so far, Buffett is way out in the lead.
So bearing all this in mind, it is not surprising that this is a favorite ETF for investors. Investing by index is seen as a fairly safe way to get exposure to a diverse range of the market’s biggest stocks at relatively low-cost fees of just 0.09% as the expenses of a managed fund are avoided. There is also a good tech focus: if we look at the proportions of SPY’s five top holdings, we can see how three tech giants, Apple (AAPL), Microsoft (MSFT) and Amazon (AMZN), all make the cut:
And investors are no doubt picking up on the very positive consensus sentiment from both the Street and financial bloggers on the ETF’s top 10 stocks (although contrast this to the very negative insider signal at just 1/10 due to depressed insider activity on both Apple and Microsoft).
Although there are periods of volatility like 2008/9, the strategy seems to be working as SPY has an annual average trailing return of 6.83% calculated over the past 15 years. But there are better options out there with even better returns- and one of these is QQQ.
2. PowerShares QQQ ETF (QQQ): While the SPY tracks the S&P 500, the QQQ tracks the Nasdaq 100 Index (i.e. the 100 largest, most actively traded US companies listed on Nasdaq). For investors looking for tech exposure this is a solid choice with a heavy weighting towards large-cap tech stocks and returns that outperform SPY. While this ETF- investor’s second favorite choice- is slightly higher priced than SPY with an expense ratio of 0.2%, it also has a higher annual average trailing return of 8.88% which reached nearly 21% last year.
Here we can see that the fund also has three of the same stocks as SPY in its top 5- but that it holds them in much larger proportions. Apple, for example, comes in at 10% of the total portfolio. And- as a note of caution- investors who hold this ETF should bear this bias in mind when investing in specific tech stocks to ensure their portfolio is really as diverse as they think.
But there can be upsets. When tech stocks plunged on June 16 the QQQ also dropped 3.1% in Nasdaq’s worst week of the year. And while stocks are back up as excited investors bought on the dip, fears remain of another tech drop, which could be sparked by a poor performance from Apple’s much-hyped upcoming iPhone X in September.
Barclays analyst Mark Moskowitz reiterated his hold rating on Apple on June 15 because “there is not much juice left." He concludes that with Apple nearing peak valuation: "This could mean a bumpy ride lower if the stock drifts back to its 3-year P/E average of 12.2x if prospects of a mega cycle diminish later this year." In the meantime, however, QQQ investors can continue to enjoy the tech ride.
3.SPDR Gold Shares (GLD): Coming in at third place, this gold-focused ETF fund is a very different choice to SPY and QQQ. In fact, with its sole asset as physical gold-bullion, a traditional safe haven, this ETF makes a smart counterpoint to index tracking funds. However, the somewhat inverse relationship means that investors backing gold have experienced very poor returns over the last few years in comparison to the SPY:
It’s not all doom and gloom; over the last six months GLD’s performance has improved dramatically with a 10.72% trailing return. But this still comes at a cost. The fund is pretty pricey with fees at 0.4%. Luckily, there is a way around these fees. The Nasdaq Smart Portfolio includes a tool which analyzes an ETF and suggests a replacement ETF with very similar exposure but which has lower management fees. Plugging GLD into this tool reveals that iShares Gold Trust (IAU) has an incredible similarity of 99.6% with management fees of just 0.25%, saving investors an impressive 0.15% in fees.
Take advantage of the wealth of ETF data available as you create your own strategy. See for yourself by clicking here.