If you are an investor who favors the buy and hold strategy of letting carefully controlled investments accumulate significant returns over time, exchange traded index funds (ETFs) may be the right vehicle for you. Even investment icon Warren Buffett knows it’s hard to beat index funds, which is why he demanded that 90% of the money he leaves to his wife be invested in an S&P 500 fund. .
Of course, you don’t have to be like Buffett and put all of your money in an index fund. But as long-term investments go on, these vehicles are an attractive and generally inexpensive choice for large and small investors alike.
What is an ETF?
Like a mutual fund, an ETF is a pool of money that invests in stocks, commodities, bonds, or a basket of other assets. Unlike mutual funds, ETFs trade like ordinary stocks on the stock exchange. Meanwhile, index funds are designed to track the performance of benchmarks such as the S&P 500 Index.
Key points to remember
- ETFs own underlying assets and divide the ownership of those assets into stocks, which investors can buy and sell through a brokerage firm.
- An index fund is designed to reflect the performance of a popular index like the S&P 500 Index or the Dow Jones Industrial Average.
- The Vanguard Total Stock Market ETF and the SPDR 500 Trust are two low-cost index ETFs that investors can purchase to participate in the performance of the US stock market.
- Investors looking for exposure to markets outside of North America may want to consider investing in the iShares Core MSCI EAFE Fund (IEFA).
If you are a long term investor planning a portfolio and looking to add index funds to the mix, you have a choice. Below are three of the best based on Assets Under Management (AUM), long-term performance, and expense ratio.
The Vanguard Total Stock Market ETF (VTI)
- Issuer: Vanguard
- Assets under management: $ 823 billion
- Yield over one year: 9.00%
- Spending rate: 0.03%
If you don’t know which index to follow or want to invest in a variety of sectors and market capitalizations, this fund may be for you. As the name suggests, the Total Stock Market ETF covers the entire national stock market in the United States, following the CRSP US Total Stock Market Index.
The VTI is a balanced fund, with a healthy mix of small, mid-cap and blue-chip stocks. VTI is a very efficient fund with a low expense ratio. Assets under management are also impressive at over $ 800 billion.
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The SPDR S&P 500 ETF (SPY)
- Issuer: State Street Global Advisors
- Assets under management: $ 262 billion
- Yield over one year: 10.15%
- Spending rate: 0.09%
First in the market, this well-established ETF is attracting a lot of attention from tactical traders and both buy and hold investors. The fund tracks the S&P 500 Index, which is a group of mostly large-cap stocks listed on the US stock exchanges. Technically, SPDR 500 ETF is a mutual fund (UIT), which means that it cannot reinvest cash dividends between distributions. This minor detail may cause the fund’s performance to deviate slightly from the index on which it is based. This fund has posted a solid one-year performance of over 10%.
Top 3 ETFs
The funds were selected on the basis of a combination of performance over time, expense ratios and assets under management. All figures were up to date as of September 12, 2019.
The iShares Core MSCI EAFE ETF (IEFA)
- Issuer: iShares
- Assets under management: $ 63 billion
- Yield over one year: 0.15%
- Spending rate: 0.07%
The IEFA provides exposure to equities from developed markets in Europe and Asia, excluding national and Canadian equities. Its benchmark index, the MSCI EAFE, covers approximately 98% of global equity markets outside of North America. In addition, it includes small cap stocks proportionate to the market, which competing funds usually do not include. Japan and the United Kingdom occupy the top two places in the fund’s portfolio.
Containing nearly 3,000 stocks, IEFA is a well-diversified fund with a low cost of ownership, making it a choice of choice for short and long-term investors seeking exposure to markets outside of North America. North. The fund is newer than the others mentioned in this article, with an inception date of October 18, 2012. Over the past year, the price of the ETF has fluctuated a lot, but hasn’t risen much yet. Nonetheless, it has brought in 2.6% per year for the past five years and 6.5% per year since its inception.