6 Requisites for a Healthy ETF Portfolio
To maintain a healthy portfolio, it is necessary to protect it from market gyrations. Ahead of the World Health Day, let us look at ways to nourish your ETF portfolio for better gains. We have also highlighted an ETF from each category and their price performance over the past five years.
Expense ratio is significant in determining the returns of an ETF. A fund with low expense ratio comfortably outperforms its more expensive counterparts if the other factors remain the same. And fortunately, expense ratio has drastically declined in recent years owing to an intensifying price war. iShares Core S&P Total U.S. Stock Market ETF ITOT is one of the cheapest choices in the space with an expense ratio of 0.03% (see: Guide to the 25 Cheapest ETFs).
This fund provides broad exposure to the U.S. equity market by tracking the S&P Total Market Index. Holding 3,554 securities, the fund is widely diversified across components with none accounting for more than 3.2% of assets. Notably, information technology is the top sector accounting for less than 21.1% while others sector make up for a nice mix. ITOT is one of the most popular liquid ETFs, with AUM of $19 billion and average daily volume of 2.9 million shares. The product has delivered returns of about 66% over a period of five years. It has a Zacks ETF Rank #3 (Hold).
An ETF should have enough liquidity in order to easily purchase and sell on the market. Volume, or the number of shares traded in a particular period, is definitely the most important consideration for determining the liquidity of a particular fund. A higher volume provides easy access to move in and out of the product, keeping the bid/ask spreads tight. Further, greater volume ensures easy creation and redemption of shares in the fund’s basket, which is a regular and vital mechanism.
While there are several ETFs that trade in higher volumes, SPDR S&P 500 ETF SPY looks an attractive pick. This ETF provides exposure to 505 largest U.S. companies by tracking the S&P 500 Index. Information technology accounts for 21.4% of the assets, while healthcare, financials, consumer discretionary and communication services round off the next spots with double-digit exposure each. SPY is one of the largest and the most popular ETFs in the large-cap space with AUM of $269.1 billion and average daily volume of around 106.6 million shares. It charges investors 9 bps in annual fees and surged more than 67% over the past five years. The fund has a Zacks ETF Rank #2 (Buy) (read: 10 Stocks Powering S&P 500 ETF in the 10-Year Bull Run).
Designing a diversified investment portfolio involves the inclusion of stocks of different companies, securities and industries in order to minimize risks and achieve optimal risk-adjusted returns. While there are several ETFs that offer diversification benefits, Invesco S&P 500 Equal Weight ETF RSP would be an interesting choice, as it offers almost equal allocation of the stocks of the S&P 500 Index.
The fund tracks the S&P Equal Weight Index, which equally weights the stocks in the S&P 500 Index. Holding 505 stocks in its basket, the ETF puts roughly 0.25% in each stock. Information technology, industrials, financials, consumer discretionary and healthcare are the top five sectors, each with double-digit exposure. The fund has amassed nearly $15.8 billion in its asset base. It witnesses average daily volume of more than 1.2 million shares. It charges 20 bps in fees per year from investors and gained about 56% over the past five years. RSP has a Zacks ETF Rank #3.
Blend funds consist of a mix of both growth and value stocks, and are considered most suitable in any type of market. This is because these funds harness their momentum in earnings to create a positive bias in the market, resulting in improved share prices. At the same time, these tap buying opportunities at depressed stock prices hoping for capital appreciation when the stock finally reflects its true market price. In particular, Vanguard S&P 500 ETF VOO having a Zacks ETF Rank #2 will be a lucrative choice.
The ETF offers exposure to a broad basket of 509 U.S. stocks by tracking the S&P 500 Index. It has a nice mix of growth, value and blend stocks with each holding no more than 3.7% of the assets. About 20.6% of the portfolio is dominated by information technology while health care, financials, and communication services round off the next three spots with a double-digit allocation each. VOO has AUM of $109.2 billion and trades in average daily volume of around 3.9 million shares. It charges 4 bps in fees and surged about 68% in the last five years.
Dividend-paying securities are the major sources of consistent income for investors when returns from the equity market are at risk. Dividend-focused products offer both safety in the form of payouts and stability in the form of mature companies that are less vulnerable to volatility in stock prices. While several choices are available in the dividend space, Vanguard Dividend Appreciation ETF VIG looks attractive (read: Top-Ranked Dividend ETFs Crushing the Market).
This is the largest and most-popular ETF in the dividend space with AUM of $33 billion and average daily volume of about 1.3 million shares. The fund follows the NASDAQ US Dividend Achievers Select Index, which is composed of high quality stocks that have a record of growing dividend year over year. It holds 180 securities in the basket with none accounting for more than 4.5% share. However, it is inclined toward industrials which comprise 31.8% while consumer services, healthcare and consumer goods round off the next three spots. The fund charges 8 bps in annual fees and has a Zacks ETF Rank #3. It has returned about 61% over the past five years.
Quality ETFs are generally rich in value characteristics as these focus on stocks with high quality scores based on three fundamentals — high return on equity, stable earnings growth and low financial leverage. This approach seeks investments in safer stocks and reduces volatility when compared with plain vanilla funds. Academic research shows that high-quality companies consistently deliver superior risk-adjusted returns than the broader market over the long term (read: Can Smart Beta & Factor ETFs Beat the Market?).
While there are several quality ETFs available in the space, iShares Edge MSCI USA Quality Factor ETF QUAL is the most popular. This fund provides exposure to stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth, and low financial leverage) by tracking the MSCI USA Sector Neutral Quality Index. Holding 125 securities in its basket, it has moderate concentrated across sectors, with each holding no more than 4.12% share. Information technology makes up 21.5% of the portfolio while healthcare, financials, communications, and consumer discretionary round off the next three spots. The product has amassed $10.4 billion in its asset base and charges 15 bps in annual fees from investors. Average trading volume is solid at around 1.4 million shares per day. The fund has surged nearly 73% over the past five years.
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Invesco S&P 500 Equal Weight ETF (RSP): ETF Research Reports
Vanguard S&P 500 ETF (VOO): ETF Research Reports
iShares Core S&P Total U.S. Stock Market ETF (ITOT): ETF Research Reports
Vanguard Dividend Appreciation ETF (VIG): ETF Research Reports
SPDR S&P 500 ETF (SPY): ETF Research Reports
iShares Edge MSCI USA Quality Factor ETF (QUAL): ETF Research Reports
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.