The Best Equity ETFs
These stock-focused exchange-traded funds all earn Gold ratings.
There's a lot to like about exchange-traded funds. They're easy to buy and sell. They're generally low cost. Depending on their investment set, they're usually tax-efficient. And they're pretty transparent: What you see is what you get. As such, they can make terrific portfolio building blocks, because they allow you to get exposure to the parts of the market that you want--and not get unwitting exposure to the parts you don't want.
A good place to start your screening process is with the Morningstar Analyst Rating. Funds that earn our top rating--Gold--are those that we think are most likely to outperform over a full market cycle.
Today, we're taking a look at the top-rated stock-focused ETFs--along with some food for thought before investing in ETFs from among these groups.
The funds in this group provide exposure to the stocks of large companies, making them fine anchors for an equity portfolio. But there are strategic differences among them.
Some in the group--including iShares Core S&P 500 ETF (IVV), SPDR S&P 500 ETF (SPY), and Vanguard S&P 500 ETF (VOO)--track the S&P 500. As a result, they provide access to large-cap stocks representing about 80% of the U.S. stock market.
Others on the list--such as iShares Core S&P Total U.S. Stock Market ETF (ITOT), Schwab U.S. Broad Market ETF (SCHB), and Vanguard Total Stock Market ETF (VTI)--follow other broader market indexes that include more stocks, some of which are smaller-cap names. While these funds also land in the large-blend Morningstar Category, they expose investors to a wider pool of stocks and market capitalizations.
Still others in the large-blend category provide exposure to a subset of stocks. Vanguard Dividend Appreciation ETF (VIG), for instance, exclusively focuses on high-quality dividend-paying stocks; its market-cap-weighted approach gives it a large-company bias.
Some investors, though, may be looking for other ideas beyond these funds that earn our top ratings. For instance, perhaps you want to tilt your portfolio toward large-growth stocks; there are ETFs that focus on those types of stocks. Or maybe you're looking to add a low-volatility ETF to your portfolio. You can find more highly rated ideas on our Morningstar Medalist ETFs list.
Mid- and Small-Cap ETFs
Mid- and small-cap funds certainly aren't portfolio essentials, especially if you already own one of the broader market index ETFs from the large-blend category--if you do, you already have some mid- and small-cap exposure.
However, if you have a large-stock-focused portfolio or if you'd like to boost your weighting in smaller names, you'll find what you need among our Gold-rated ETFs in the mid- and small-cap categories.
Some--including iShares Core S&P Mid-Cap ETF (IJH), Schwab U.S. Mid-Cap ETF (SCHM), and Vanguard Mid-Cap ETF (VO)--focus exclusively on mid-cap names, while others--iShares Core S&P Small-Cap ETF (IJR), Schwab U.S. Small-Cap ETF (SCHA), and Vanguard Small-Cap ETF (VB)--target smaller companies.
And Vanguard Extended Market ETF (VXF) (and others of its ilk) includes some of both.
Of course, there are other ways to slice and dice smaller stocks. Perhaps you want to tap into the small-value effect; there are ETFs that will help you do that. You can find all of our highly rated ideas on our Medalist ETFs list.
Like mid- and small-cap funds, international-stock funds certainly aren't must-owns. International stocks have been moving increasingly in lock step with U.S. stocks during the past decade and therefore no longer offer the diversification benefits that they have in the past. But remember that investment opportunities exist around the globe; many think it's a mistake to limit your investments to U.S. shores.
All three of the Gold-rated funds here target stocks of varying sizes across more than 40 overseas developed and emerging markets.
Those who may want to slice the international market differently--perhaps you'd like access only to stocks in developed countries, or you'd like to tilt your portfolio more toward emerging-markets names--can cull additional ideas to research further from our Medalist ETFs list.
Susan Dziubinski does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.