If you’re thinking about investing in the stock market, you should consider investing in exchange-traded funds (ETFs). ETFs can generate steady returns, and they carry less risk than individual stocks. There are a wide variety of ETFs that you can invest in, which begs the question: how can you find the best ETF for your investment strategy?
This investor’s guide will help you identify the best ETFs for any kind of portfolio.
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What is an ETF?
An exchange-traded fund (ETF) is a basket of securities in which you can buy shares. When you purchase an ETF share, you don’t own any individual securities—you only own a percentage of the ETF itself.
What that means is that you’re entitled to a portion of the profits generated by all the securities held in the ETF. ETFs track the collective performance of their securities and then divide the dividends and interest earnings among investors. (Read our guide on how to invest in ETFs for a deep dive.)
Here are a few reasons why an ETF is a good investment option:
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Less Risk: An individual stock can fall dramatically in value if there’s an economic downturn or if the company faces adversity or a financial obstacle. ETFs are better protected against price falls because they hold so many different securities (hundreds or thousands). Even if many securities perform poorly, there are likely to be many more securities that perform well and can counterbalance the losses.
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Diversification: Since ETFs hold so many different securities, they’re a popular choice for investors trying to build a diverse portfolio. In fact, you can build a diverse portfolio by investing in just a few different types of ETFs.
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Reliability: ETFs can’t generate the massive returns that individual stocks can, but many investors prefer ETFs because they generate steadier returns. That makes ETFs especially helpful for long-term investors, like those who are saving for retirement. As they say, slow and steady wins the race.
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High Liquidity: ETFs trade on the stock market, so they have high liquidity. In other words, you’re able to buy and sell ETF shares very quickly. That makes them an attractive option for short-term investors or active traders, who prefer to capitalize on price falls or low rates. The higher liquidity is why many investors choose ETFs over mutual funds.
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Low Cost: Investors choose ETFs over mutual funds because ETFs tend to have lower costs. ETFs don’t enlist costly investment managers (like mutual funds), and their high liquidity makes them cheaper. Furthermore, many online stock brokers won’t charge you commission fees when you buy or sell ETFs.
Types of ETFs
There are many different types of ETFs in which you can invest. The most common types of ETFs include:
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Stock ETFs: These ETFs hold securities.
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Bond ETFs: These ETFs hold government and corporate bonds.
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Industry ETFs: These ETFs hold stocks only from companies within a single industry, like technology, finance, or transportation.
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Size-Based ETFs: These ETFs only hold stocks in small, medium-sized, or large companies.
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Commodity ETFs: These ETFs are invested in commodities, like gold, silver, or crude oil.
So what’s the best ETF to invest in?
Generally, you want to cover your bases and invest in most of the ETF types listed above.
When it comes to industry ETFs, you may want to buy ETFs in one or two industries that you think will perform strongly over the next five years. You can then balance out those investments by investing in one or two ETFs that cover a broader range of industries.
The Best ETFs to Invest In
Here are the best ETFs to invest in for 2021. They encompass a wide range of ETF types: broad industry, specified industry, commodities, etc. You can use this list to create a diverse investment portfolio or find an ETF that’s best-suited for your investment strategy.
Best REIT ETF
A real estate investment trust (REIT) is a company that owns properties and finances real estate development. Most REITs trade on the stock market, and there are about 30 ETFs that hold REIT securities.
The Pacer Benchmark Industrial Real Estate SCTR ETF (INDS) is the best REIT ETF.
Created in 2018, the ETF currently holds about $113.1 million in assets and yields annual dividends of 1.99%. It has performed well in 2020, with 3.3% growth.
The three largest holdings are Prologis Inc., Duke Realty Corp., and Americold Realty Trust, but the ETF holds securities across small cap, medium cap, and large cap REITs—it’s well-diversified.
This may be a good ETF for you if you want to start investing in real estate—or if you’re already a real estate investor and you want to diversify your portfolio by investing in stocks.
Best Dividend ETF
If you’re trying to maximize your earnings, you’ll want to invest in an ETF that holds securities with higher dividends. The best dividend ETF is the WisdomTree U.S. Quality Dividend Growth Fund (DGRW).
What’s unique about this ETF is that it only holds stocks with dividends projected to grow—it doesn’t pick stocks solely because the dividends were high this year or in previous years. After all, just because a company generated high dividends this year doesn’t necessarily mean it will do the same in the future. This ETF only holds stocks that are forecasted to grow in profitability.
This could be a good ETF option if you’re a long-term investor and plan on holding your ETF for five years or longer.
Best Tech ETF
The technology sector consistently outperforms the broader economy, so it’s a good sector to invest in.
The ARK Next Generation Internet ETF (ARKW) is the best tech ETF. This is an actively-managed ETF, and it doesn’t use an index to track the technology sector. Instead, ARKW chooses stocks in companies that are projected to make large gains from innovations, mostly in the fields of cloud computing, artificial intelligence, and digital mediums.
ARKW’s largest holdings are Tesla, Inc., Square, Inc., and Roku, Inc. In total, it holds about $2.8 billion in assets.
This could be a good ETF if you’re already invested across a broad array of industries, and you want to zero in on a sector that’s likely to outperform the larger economy.
Best Vanguard ETF
Vanguard is known mostly for mutual funds, but it’s also the second-largest sponsor of ETFs in the United States. The Vanguard S&P 500 ETF (VOO) is the best Vanguard ETF and one of the best broad-market ETFs.
This ETF tracks the S&P 500 index, which is large and diversified. The expense ratio is only 0.03% and typically generates 10% annual returns, so long as you hold for an extended period. It’s an excellent option for long-term investors and for investors who need to diversify.
The Vanguard FTSE Developed Markets ETF (VEA) is also worth mentioning. This ETF contains nearly 4,000 holdings from 25 different countries. It’s a good option if you’re over-invested in American securities and want to add foreign-based securities to your portfolio.
Best Fidelity ETF
Fidelity is another large financial institution that’s well-known for its mutual funds and 401(k) holdings. The Fidelity Quality Factor ETF (FQAL) is arguably the best Fidelity ETF.
FQAL is not a broad-market ETF—quite the opposite. It contains about 120 stocks from companies with a strong “quality factor.” These companies have demonstrated long-term durability, along with sound financials and cash flow. They’re all companies that have shown resilient profitability and usually pay out dividends. This may be a good option if you have less risk tolerance and you’re seeking out stronger companies to invest in. It’s also a good option if you’ve already invested in broad-market ETFs and you want to diversify.
But if you need to invest in a broad-market ETF, you might consider the Fidelity ZERO Total Market Index Fund (FZROX). This is a newer ETF that tracks the entire U.S. stock market. It’s incredibly diversified and has outperformed similar ETFs over a long period.
Best Gold & Silver ETF
When the stock market hits a rough patch, investors often use gold and silver as a safety net because their values are stable. ETFs have made it easier than ever to invest in these commodities.
The SPDR Gold Trust (GLD) is an ETF that roughly indexes the price of gold bullion, with a 0.40% expense ratio. It’s structured as a “grantor trust,” so investors own the underlying assets—in this case, gold. But that also means you could be subject to higher taxes.
The Invesco DB Silver Fund (DBS) is the best silver ETF. This ETF trades futures contracts on silver and yields 0.90% dividends. However, exposure to futures contracts gives this ETF significantly more risk. Be sure to read our guide on how to invest in commodities if you’re planning on investing in gold or silver.
Best Oil ETF
Like silver ETFs, oil ETFs also trade futures contracts. The United States 12 Month Oil Fund (USL) is unique in that it doesn’t benchmark any contract that’s set to expire within two weeks. If the near-month futures contract is within two weeks of expiration, it uses the next month’s expiring contract as a benchmark. This reduces the risk of your exposure to contango.
Once again, investing in commodities is different than investing in the stock market, and it’s not recommended for beginning investors.
Best Energy ETF
Investing in the energy sector can be high-risk, high-reward, but if you have a well-balanced portfolio and want to top it off with a riskier investment, then an energy ETF might be a good option for you.
The Fidelity MSCI Energy Index ETF (FENY) is the best overall energy ETF. It predominantly holds stocks in Exxon Mobil Corp. and Chevron Corp., but it also holds stocks in many smaller companies. FENY has more energy stocks than the S&P 500 Energy Index.
FENY is also the least expensive energy ETF on the market, with an annual fee of only 0.08%. And if you have an account with Fidelity, you can trade this ETF commission-free.
Best Financial ETF
There are about 30 different ETFs for the financial sector, and the Financial Select Sector SPDR (XLF) is one of the best. This is the largest financial ETF, with over $18.23 billion in assets. This ETF has very low costs and only charges an expense ratio of 0.13%.
XLF contains about 65 stocks and is well-diversified. Represented companies include insurance providers, banks, REITs, consumer finance, mortgage finance, and capital markets.
This ETF could be a good option if you’re already invested in broad market ETFs and you want to buy an ETF that’s focused on a particular industry.
Best Bank ETF
You might be wondering, “what’s the difference between a financial ETF and a bank ETF?
Financial ETFs are more diversified and include stocks from a greater variety of financial companies. Bank ETFs hold stocks that are more exclusively focused on banks, and they ignore capital market firms, insurance providers, and other companies that don’t do banking.
Although it’s relatively new (founded in 2016), the First Trust Nasdaq Bank ETF (FTXO) is arguably the best bank ETF because of its unique approach.
FTXO tracks the Nasdaq U.S. Smart Banks Index, an index that measures banks by growth, value, and volatility. The banks represented here tend to be more durable and profitable. There are only 28 stocks held within FTXO, which is low for a bank ETF.
However, there is some significant stock overlap between FTXO and XLF, so be wary about investing in both. You might prefer FTXO over XLF if you have a higher risk tolerance.
Summary
Exchange-traded funds (ETFs) are baskets of securities you can buy and sell on the stock market. The best ETFs generate the highest returns for the lowest costs. When you’re deciding which ETFs to buy, you should consider your investment portfolio—aim to create a diversified portfolio in which your ETFs represent a wide variety of industries, companies, and asset types. Purchase broad-market ETFs first, and then purchase a smaller percentage of industry or commodity ETFs.
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