SPY

3 Top ETFs for a Diversified Stock Portfolio

Navigating the stock market can be overwhelming, with the need for extensive research, continuous monitoring of market trends, and the inherent risks involved. For those seeking market exposure without the complexities of individual stock selection, exchange-traded funds (ETFs) offer a streamlined solution.

A well-chosen set of ETFs can provide comprehensive coverage of the market's key sectors, including large-cap growth, tech innovation, and small-cap potential. Here is an overview of three popular ETFs that offer broad coverage and outstanding long-term performance.

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1. SPDR S&P 500 ETF Trust

The SPDR S&P 500 ETF Trust (NYSEMKT: SPY) mirrors the S&P 500 Index, encompassing 500 of the largest U.S. corporations. Since its launch in 1993, the SPY has achieved a cumulative return exceeding 2,000%, dividends included.

With an expense ratio of just 0.09%, the SPY stands out for its cost efficiency, significantly undercutting the category average by 88.6%. While not the absolute lowest among its peers--Vanguard's S&P 500 ETF claims that distinction-- the SPY's affordability is notable.

SPY's trading volume is immense, averaging around 70 million shares daily. This liquidity has made it a favorite among day traders and those seeking income through derivatives. The ETF's trading activity is so robust that it has fostered a dedicated community of SPY options traders.

2. Invesco QQQ Trust

The Invesco QQQ Trust (NASDAQ: QQQ) tracks the Nasdaq-100 Index, which includes the 100 largest non-financial companies on the Nasdaq exchange. The QQQ's expense ratio comes in at 0.20%, higher than some passively managed funds but still well below the 0.98% category average.

The QQQ is also known for its liquidity, with nearly 45 million shares changing hands on an average day. This makes it a prime choice for active traders and those with substantial investments.

Over the last decade, the QQQ has delivered an impressive average annual return of 18.8%, outpacing the SPY's 10.8% average. However, the QQQ's tilt toward tech stocks makes it riskier and more volatile than the SPY.

3. iShares Russell 2000 ETF

The iShares Russell 2000 ETF (NYSEMKT: IWM) targets the Russell 2000 Index, which is composed of small-cap American companies. Over the past ten years, the IWM has delivered average annual returns of 7.8%, including dividends.

While its performance has been more modest compared to SPY and QQQ, small-cap stocks have historically led the market. Should this trend resume once interest rates fall, the IWM is poised to take flight.

The IWM's expense ratio is 0.19%, which, although not the lowest for small-cap ETFs, is substantially less than the 1.00% category average. The ETF enjoys high liquidity, with roughly 34 million shares traded daily, yet it carries a fairly substantial risk profile due to its focus on smaller companies.

Final thoughts

These three ETFs--SPY, QQQ, and IWM--provide investors with a diversified approach to the stock market, covering the spectrum from large-cap stability to tech innovation to small-cap growth. They cater to investors aiming for a balanced investment portfolio that taps into various market segments.

As with any investment, though, it's crucial to align your ETF selections with your personal investment goals and risk tolerance. To lower your risk profile, for example, you could swap out the QQQ or IWM for a low-risk bond fund.

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George Budwell has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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