The Best ETFs and How They Fit in Your Portfolio

Exchange-traded funds make it easy to diversify a portfolio and are often easier for investors to buy than their mutual fund counterparts. That’s because they’re traded on an exchange and don’t have the investment minimums that some mutual funds do.

But not all ETFs are alike. There are many options to choose from, so it’s important to identify high-quality ETFs that meet the needs of your portfolio. Morningstar rates ETFs relative to their category peers, so you can find best-in-class options in the areas that are important to you.

We break down our list of the best ETFs by Morningstar Category so that you can understand the roles these funds can play in your portfolio as you consider your options.

How to Find the Best ETFs for Your Portfolio

The first step to finding the best ETF for you is understanding its role in your portfolio.

Start by determining your asset allocation—the mix of stocks, bonds, cash, and other investments in your portfolio. Factors like your investing timeline, risk tolerance, capacity, and investing goals make your “right” asset-allocation mix unique to you, but Morningstar’s Christine Benz recommends using the Morningstar Lifetime Allocation Indexes as a starting point.

Once you have a sense of an appropriate asset-allocation mix, you can think of your investments as building blocks. The largest and most important components are your core holdings, or the assets that make up the majority of your portfolio. Once those positions are filled, you can choose to add noncore holdings that play a smaller role in your portfolio.

Core investments should be broadly diversified, low-cost funds that cover the major asset classes:

• US stocks
• Foreign stocks
• High-quality bonds

You can further diversify by adding other asset classes or subasset classes, but a portfolio made of core holdings can stand on its own. Still, even simple diversification can reduce the risk in your portfolio by lowering the chances that all your investments lose value at the same time.

Whether a key building block in your portfolio or a niche addition, there are ETFs that fit nearly every role.

How Does Morningstar Determine Which ETFs Are the Best?

The best ETFs receive Morningstar Medalist Ratings of Gold, the highest rating on a five-tier scale that also consists of Silver, Bronze, Neutral, and Negative ratings.

The Medalist Rating may be assigned by an analyst or driven by quantitative algorithms that allow Morningstar to scale its fund coverage. To narrow the scope of this list, the funds below have ratings assigned by analysts.

The Medalist Rating is a forward-looking measure of Morningstar’s confidence in a fund’s ability to beat its peers, after accounting for fees and risk, through a market cycle. Gold, Silver, and Bronze ratings indicate that analysts expect a fund to outperform its peers over a full market cycle; Neutral and Negative ratings mean that analysts aren’t confident in a fund’s ability to do so.

A fund’s rating is based on an assessment of the fund managers’ approach to their investment strategy (Process), the individuals who manage the fund (People), and the asset manager that offers the fund (Parent). These pillar assessments also account for other factors like Price and Performance.

The relative impact of each pillar on the overall rating depends on whether a fund is actively or passively managed. For the many ETFs that are passively managed, the Process Pillar is more important than the People assessment.

The majority of the Gold-rated ETFs listed below comprise low-cost, passively managed funds that our analysts believe will tightly track a reasonable index over a long time frame. Many of these ETFs can be core holdings in a portfolio; few niche ETFs receive Gold ratings because they take on too much risk by targeting narrower themes.

The Best Stock ETFs

Stocks have the highest growth potential among the core asset classes, but they also carry the most risk. Investors with long investment horizons will likely put most, if not all, of their portfolio assets into stocks.

Most of the best stock ETFs are passive, broadly diversified US large-cap stock funds that can fill a core spot in a portfolio. A handful of funds that invest in other domestic equity categories also made the cut. High-quality options that provide foreign stock exposure round out the list.

The Best Large-Cap US Stock ETFs

If you’re looking for a passive core holding, consider starting with a large-cap ETF.

Large companies dominate the stock market; such firms account for over 75% of the US market’s value. In particular, ETFs in the large-blend category are about as “core” as you can get because they include both growth and value stocks.

Morningstar research has shown that most active managers haven’t added much value over their respective benchmark indexes in this part of the market, so low-cost index funds are terrific options here.

The Best International-Stock ETFs

You can use international-stock exposure to counterbalance some of your US-specific risk and round out your portfolio’s core stock allocation.

ETFs in the foreign large-blend category are good candidates to anchor your portfolio, while the small/mid-cap and European stock funds can further diversify your foreign stock exposure. And if you want to cover both domestic and international stocks with a single ETF, you can look to the global large-stock blend category.

The Best Small- and Mid-Cap US Stock ETFs

You can supplement your domestic stock allocation with exposure to domestic small- or mid-cap stocks, but these funds aren’t necessarily a core piece of the portfolio.

Depending on the composition of your large-blend fund, you may have sufficient exposure to these areas already. The real estate ETF that made the list has historically been a helpful diversifier, but correlations between REITs and the broader US market have gotten tighter in recent years.

The Best Bond ETFs

Bonds can help reduce the risk in your portfolio, which is helpful as your investing timeline gets shorter and your goal shifts from maximizing your potential return to maintaining your accumulated wealth.

Low expenses are an even bigger performance differentiator for safer, low-returning assets like bonds than they are for higher-returning assets like stocks. For that reason, low-cost ETFs can be valuable building blocks in this area.

The Best Intermediate- and Long-Term Bond ETFs

If short-term cash needs aren’t a concern, high-quality intermediate- and long-term bond funds are good options for fixed-income exposure.

If you’re looking to fill a relatively small bond allocation, one ETF in the intermediate core bond category is likely enough. There are also high-quality offerings in the intermediate core-plus bond category if you want to lean into some noncore bond exposure.

If you’re looking to hold bonds in a taxable account, you may want to consider municipal bonds. While Morningstar generally recommends traditional mutual funds for muni exposure, one municipal-bond ETF has earned a Gold rating.

The Best Short-Term and Inflation-Protected Bond ETFs

While not for everyone, short-term and inflation-protected bond ETFs can provide diversification in a bond-heavy portfolio. You can also use short-term bond funds to help cover your short-term spending.

Funds focused on Treasury Inflation-Protected Securities can be particularly helpful if you want to add some defense against high inflation, but they’re best kept in a tax-sheltered account because of their high tax costs.

The Best Allocation ETFs

Allocation funds combine major asset classes like stocks, bonds, and cash in a single package. As Morningstar’s Amy Arnott explains, there are two major categories. Some allocation funds aim for a particular risk level and range from conservative (more bonds and cash) to aggressive (more stocks).

The second major kind of allocation fund is the target-date fund, which provides diversified exposure to stocks, bonds, and cash for investors who have a specific date in mind for retirement or another goal.

The Best Target-Date ETFs

Target-date funds can be a good fit for hands-off investors who are looking for a simple way to streamline and diversify their portfolios.

These funds aim to provide an optimal level of return and risk based on the target date. Management gradually adjusts the allocation among asset classes to more conservative mixes as the target date approaches.

The only allocation ETFs that earn Medalist Ratings of Gold are part of the iShares LifePath Target Date ETF series.

Contributors

• Research Contributors: Amy Arnott, Bryan Armour, Ryan Jackson
• Design Editors: Zhan Su
• Editors: Susan Dziubinski, Emelia Fredlick, Tori Brovet