3 Popular ETFs to Avoid
Ben Johnson: Hi. I'm Ben Johnson, director of global ETF research for Morningstar, and today I'm here to call out three popular ETFs that I think most investors should avoid.
The first ETF on my list is arguably the most popular ETF on the planet. It was the first ETF listed in the United States when it began trading in 1993, and it remains the largest ETF in the world with nearly $380 billion in assets under management.
But just because the SPDR S&P 500 ETF, more commonly referred to as SPY, is the biggest doesn't mean it's the best. There are other, better options for investors looking for exposure to the S&P 500 index that are both cheaper and are built in such a way that they'll be able to do a better job of eking out every last decimal point of the S&P 500's performance over the long run. Those ETF alternatives include the iShares Core S&P 500 ETF, the Vanguard S&P 500 ETF, and SPY's younger, cheaper, better-constructed sibling SPDR Portfolio S&P 500 ETF. Each of these three funds carries a lower expense ratio--at just 0.03% for each--and each of them earns a Morningstar Analyst Rating of Gold, while SPY earns a Morningstar Analyst Rating of Silver, largely on account of its higher fee.
While we still like what is one of the most-liked and best-known ETFs around, we'd point most investors to the better alternatives that are out there.
The second ETF on my list sits in a corner of the market that has been popular among investors as interest rates have been on the rise: bank loans.
SPDR Blackstone Senior Loan ETF is an actively managed fund that navigates this market niche. The fund boasts a seasoned leadership duo and large supporting cast, but the team's proclivity to radically shift the portfolio based on top-down views makes consistent long-term outperformance challenging.
The fund's performance has been underwhelming since its inception in 2013. From that point through April 23, 2022, its return landed in the bottom half of its Morningstar Category.
This fund earns a Morningstar Analyst Rating of Neutral.
Investors in the space might want to consider looking at Gold-rated T. Rowe Price Floating Rate instead.
The third and final ETF on my list is a fund helmed by a manager that has become a global phenomenon in recent years. Known for her bold calls and big bets, Cathie Wood and her team at ARK have steered their flagship active ETF, the Ark Innovation ETF through a period of both chart-topping and, more recently, gut-wrenching returns.
We've recently downgraded ARKK's Morningstar Analyst Rating from Neutral to Negative as the firm has shown few signs that it has improved its risk management. It's clear that their carelessness in this respect has hurt many investors of late, and we're concerned it could hurt more in the future. While the fund's long-term track record is still solid, its recent drawdown has tested investors' mettle, as its price has dropped nearly 70% from its all-time high. This washout has left most of its shareholders underwater.