ETFs are exchange-traded funds that hold a group of assets such as stocks and bonds. The shares of ETF trade on an exchange just like company stock. ETFs allow investors to acquire an interest in the fund’s diversified holdings just by buying one ETF share. The cost of one ETF share is usually in the range of $20-$200.
ETFs have become highly popular as they let investors own a diverse set of securities at a low cost. They also let investors get specific exposure to distinctive areas of the market, such as countries, industries, and asset classes. ETFs can certainly be a good way to invest in the stock market for people with no or very little knowledge about the stock market.
The US ETF industry has continued to grow in 2020 and has reached $5 trillion, according to a new research report published by Cerulli Associates. As per the report, it is expected to grow even further in 2021. Therefore, without any further delay, let us find out the 10 best ETFs for 2021!!
1. Vanguard S&P 500 ETF (ticker: VOO)
Type – Large-Cap blend
Assets under management – $172.5 billion
Dividend yield – 1.6%
Expenses – 0.03% ($3 annually for every $10,000 invested)
Vanguard S&P 500 ETF tracks the S&P 500 Index of primarily US blue-chip stocks. The S&P 500 is weighted as per market capitalization. It means that the larger the stock, the more assets Vanguard S&P 500 ETF invests in that stock, and thus the more impact the stock has over the fund’s performance. An ill effect of this could be observed when investors rotate out of the heavily weighted 2020 standouts such as Apple, Microsoft, Amazon, and Tesla into stocks that have less influence on or are outside of the S&P 500. Nonetheless, in our opinion, it is still one of the best ETFs to invest in 2021.
2. SPDR S&P 500 ETF (ticker: SPY)
Type – Large-Cap blend
Assets under management – $340 billion
Expenses – 0.09%
SPDR S&P 500 ETF is arguably the biggest and the most popular ETF in the world. It is the largest ETF for many reasons.
- It has about $340 billion worth of total assets under management at present.
- Also, it trades about 80 million shares each day.
The fund is benchmarked to the Standard & Poor’s 500 index of the 500 largest US stocks. SPY spreads the cash invested by the investors in the fund across these top 500 US stocks. Thus, if anybody wishes to leverage the capital appreciation provided by the stock markets, SPDR S&P 500 ETF is one of the most reliable and best ETFs for 2021.
3. Vanguard Value ETF (ticker: VTV)
Type – Large-Cap Value
Assets under management – $61.4 billion
Dividend yield – 2.7%
Expenses – 0.04%
Vanguard Value ETF holds roughly 330 US large- and mid-cap stocks that have high scores on value metrics such as:
- price-to-earnings (P/E)
- forward P/E
It is an inexpensive index fund that can prevent the investors from having a single value pick blow up as it invests across the style. VTV is one of the best ETFs for 2021 owing to several factors such as low fees, simplicity, and exposure to value stocks that are a potential hotbed for returns in the years to come.
To quote Morningstar Director, Alex Bryan, “VTV is a Morningstar Gold-rated fund and it is one of the cheapest large-value funds available with an excellent, low-turnover strategy that accurately represents the opportunity set available to its peers.”
The fund invests in old-guard blue-chip stocks such as Johnson & Johnson, Procter & Gamble, and Berkshire Hathaway led by Warren Buffett. Presently, the fund yields more than the overall market, thus making it an appropriate buy for investors who are looking for a steady income and who are willing to hang on even long after the year 2021 comes to an end.
4. Schwab US Small-Cap ETF (ticker: SCHA)
Type – Small-Cap blend
Assets under management – $12.5 billion
Dividend yield – 1.2%
Expenses – 0.04%
As Invesco analysts say, “Small-caps generally outperform large-caps when the economy is recovering, and a new credit cycle is emerging.” Schwab US small-cap ETF leverages exactly that.
It is a simple, effective, and utterly diversified way to invest across small-cap stocks. However, the portfolio of SCHA does not only include the small-caps but also include a few mid-caps, too. These stocks are predominantly dependent on the domestic economy, so considering that the US economy is up for a rebound in 2021, SCHA could be one of the best ETFs to invest in 2021.
Top holdings in SCHA include Novocure, Caesars Entertainment, and Cloudflare. They each constitute only about 0.4% of the fund’s total weight. So, it is very difficult for a single stock to tank this portfolio. However, SCHA leans quite heavily on few sectors such as healthcare (18.4%), industrials (15.3%), and financials (15.1%) as compared to others. Thus, by investing in this fund, investors can enjoy significant exposure to a few of the ensuing years’ best rotation plays.
5. Distillate US Fundamental Stability & Value ETF (ticker: DSTL)
Type – Large-Cap Value
Assets under management – $202.1 million
Dividend yield – 0.8%
Expenses – 0.39%
Distillate US Fundamental Stability & Value ETF does not depend upon any of the valuation metrics such as P/E or P/S or any other traditional value metrics. Instead, this ETF relies on free cash flow. The free cash flow is equal to cash profit, which is left after the capital expenditure has been deducted from the net profit, is divided by its enterprise value. The enterprise value measures a company’s size and includes market capitalization, overall debt owed, and cash on hand.
DSTL starts out with 500 of the biggest US companies, then removes the ones that are expensive based on its definition of value, ones that have high debt and/or volatile cash flows.
Presently, DSTL’s portfolio is heavy on tech stocks (25%), though leaner than what it was in 2020 (32%). DSTL is also heavy on sectors such as industrials (19%) and health care (19%).
6. Invesco WilderHill Clean Energy ETF (ticker: PBW)
Type – Thematic (Clean energy)
Assets under management – $1.7 billion
Dividend yield – 0.4%
Expenses – 0.70%
The Invesco WilderHill Clean Energy ETF invests in 46 green energy stocks which include solar energy firms, lithium miners, and electric vehicle makers. The ETF has provided roughly 162% returns through mid-December 2020, making it one of the top five equity ETFs in the market and one of the 10 best ETFs to buy in 2021. It provides investors exposure to mostly mid-and small-cap stocks with great growth potential. Top holdings in the fund’s portfolio at the present include FuelCell Energy, Blink Charging, and Nio.
7. Invesco QQQ ETF (ticker: QQQ)
Type – Large-Cap Growth
Assets under management – $161 billion
Expenses – 0.20%
Invesco QQQ ETF focuses only on non-financial Nasdaq stocks and thus, it is a very tech-heavy fund. In 2020, Invesco QQQ ETF has delivered roughly three times the returns of SPDR S&P 500 ETF mainly because the total number of stocks in the Nasdaq-100 is much smaller than the S&P 500. It allows QQQ to focus more on fewer companies. Also, the fund’s portfolio constituents such as e-commerce giant Amazon and tech mammoth Microsoft did exceedingly well in 2020.
8. Vanguard Growth ETF (ticker: VUG)
Type – Large-Cap Growth
Assets under management – $148 billion
Expenses – 0.04%
Vanguard Growth ETF is one of the best ETFs to buy in 2021 for investors who do not wish to go heavy on a specific sector but still wish to focus on higher growth companies. VUG assumes a more sophisticated approach to investing as compared to SPDR S&P 500 or Invesco QQQ ETF. It leverages screening techniques and chooses only those companies that are growing faster in profits and revenues as compared to their peer set.
It allows the investors to get exposure to a variety of growth stocks including tech stocks such as Apple, retailers such as Home Depot, and even railroad stock Union Pacific for that matter. Its portfolio currently consists of 250 stocks and provides all the benefits of diversification in a single ETF.
9. Global X FinTech ETF (ticker: FINX)
Type – Thematic (Financial Technology)
Assets under management – $930.9 million
Dividend yield – 0.0%
Expenses – 0.68%
Global X FinTech ETF consists of a portfolio of financial technology (Fin-Tech) companies. FINX soared by 46% through mid-December 2020 as a result of the surge in demand for the digital solutions provided by the Fin-Tech companies during the COVID-19 pandemic.
FINX invests in 33 fin-tech stocks such as Square, PayPal, and TurboTax maker Intuit to name a few. The fund is also geographically diversified and international companies constitute about 40% of its portfolio, thereby giving investors access to attractive companies such as the Dutch payment firm, Adyen, and Brazil’s StoneCo. Stone Co. is one of Warren Buffet’s stocks and it climbed by 88% in 2020.
10. iShares ESG Aware MSCI USA ETF (ticker: ESGU)
Type – Large-cap blend (ESG criteria)
Assets under management – $12.7 billion
Dividend yield – 1.3%
Expenses – 0.15%
ESG stands for environmental, social, and corporate governance. iShares ESG Aware MSCI USA ETF tracks the MSCI USA Extended ESG Focus Index that comprises large- and mid-cap stocks which according to MSCI have positive ESG characteristics. MSCI, however, excludes firms such as weapons manufacturers and tobacco companies, and those involved in very severe business controversies.
In all, ESGU invests in more than 340 companies that can act as a core large-cap holding. ESGU (19.4%) has outperformed Vanguard S&P 500 ETF (15.4%) in total returns (price plus dividends). Thus, ESGU is one of the best ETFs to buy in 2021 for someone looking for bedrock ESG exposure.
However, unlike Vanguard S&P 500 ETF, ESGU is not perfectly balanced. Nearly 30% of the fund’s assets are invested in technology while it has lower than 3% exposure each in four different sectors.
Now that we know the best ETFs for 2021, let us get started on this exciting journey!
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