3 Great ETFs to Play a Supporting Role in Your Portfolio

For many investors, a select few core funds make up the bulk of their portfolio, while a handful of satellite holdings fill in the cracks. These portfolios function like movies. The broadly diversified funds that focus on traditional asset classes like U.S. and foreign stocks and bonds serve as the main characters, and funds that target a narrower corner of the investment universe play a supporting role. It's critical to find the right core holdings to lay the foundation for your portfolio, but, if we've learned anything from Heath Ledger's role in The Dark Knight, Octavia Spencer in The Help, or Robert De Niro in The Godfather Part II, it's that a supporting piece can take the finished product to the next level. So, today, I'll highlight three medalist ETFs that are well-positioned to play a supporting role in your portfolio.

3 Great ETFs That Can Play a Supporting Role in Your Portfolio

These exchange-traded funds earn a Morningstar Analyst Rating of Bronze or Silver.

1. Avantis U.S. Small Cap Value ETF AVUV
2. SPDR S&P Dividend ETF SDY
3. IShares Core MSCI Emerging Markets ETF IEMG

Avantis U.S. Small Cap Value ETF

Since most core equity strategies tilt toward large-cap stocks, let's start with a fund that scales down the market-cap ladder: Bronze-rated Avantis U.S. Small Cap Value ETF, which trades under the ticker AVUV.

This fund targets small-cap stocks with the best combination of value and profitability characteristics. Value and profitability make an attractive duo: Both factors have historically been tied to market-beating returns, and they tend to excel at different times, which should allow this fund to remain competitive across most markets. By focusing on stocks that are both cheap and profitable, AVUV can find underpriced companies while avoiding many of the riskier options that reside in the small-cap bargain bin.

With an expense ratio of 0.25%, AVUV ranks as one of the cheapest funds in the small-value category. And its Avantis portfolio management team carefully minds trading costs, which adds to its low-cost profile.

This fund excludes real estate and utilities stocks and overweights energy and consumer discretionary firms to fill the void. The cyclical nature of these sectors can increase volatility, but this 700-stock portfolio is a well-diversified option that should stack up well in the small-cap space long term.

SPDR S&P Dividend ETF

The next ETF up is Silver-rated SPDR S&P Dividend ETF, ticker SDY.

This fund selects stocks from the S&P 1500 Index, only admitting those that have paid dividends for at least 20 consecutive years. That's a strict requirement that filters out all but the market's most reliable, disciplined dividend payers. Stocks that make the cut are weighted by their indicated dividend yield. So, while the fund prioritizes the most established dividend stocks to the highest-yielding, it has provided solid income to investors.

SDY is chock-full of familiar franchises with solid industry footing and healthy balance sheets, like Procter & Gamble PG or Coca-Cola KO. It resides in the large-value Morningstar Category, but its composition looks much different from the Russell 1000 Value Index, its category benchmark. Its average market cap is about one third of that index, and it overweights defensive sectors like utilities, healthcare, and consumer staples. This fund tends to post middling performance during market rallies, but it has historically held up well in bear markets, making this bundle of dividend diehards a stabilizing force in a portfolio's stock sleeve.

IShares Core MSCI EM ETF

At the end of July 2022, U.S. investors parked over 3 times as much money in U.S. equity funds as international-stock funds, even though U.S. stocks only represented about 60% of the global market. The final ETF on my list takes a cut-and-dried approach to portfolio construction but focuses on an area of the foreign-stock market that many investors overlook: Bronze-rated iShares Core MSCI Emerging Markets ETF, ticker IEMG.

This fund sweeps in stocks of all sizes from 24 emerging markets and weights the portfolio by market capitalization. Market-cap-weighting is a sensible tack because it channels the market's consensus opinion on each stock's relative value and keeps turnover under wraps. This fund tallies over 2,400 names, the 10 largest of which constituted less than one fifth of the portfolio at the end of July. This sprawling snapshot of the emerging-markets landscape comes at a lean price; its 0.09% expense ratio ranks as one of the diversified emerging-markets category's cheapest.

Investing in emerging-markets stocks comes with more risk than their developed-markets counterparts. Political risks are more prominent in these economies, as IEMG investors saw this January when the fund marked to zero its Russian holdings, which constituted about 3% of the portfolio.

Still, emerging-markets stocks represent about 8% of the global equity universe and look very cheap relative to their fundamentals after a turbulent start to 2022. For investors whose portfolios exclusively feature U.S. or other developed-markets stocks, IEMG could be worth a look.

Read "Flows Into ETFs Hold Steady as Markets Wobble in August" and more from Ryan Jackson. Watch "3 Low-Volatility Funds in the Zone" by Russel Kinnel for more fund picks.