I recently wrote a comprehensive article about exchange-traded funds (ETFs) in my monthly magazine. But I wanted to highlight them again here as I think that a lot of younger investors don’t realize how easily ETFs can 1) introduce you to investing; and 2) help you diversify your portfolio without taking on the risks that most folks associate with buying individual stocks.
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Back when my first employer offered the opportunity to invest in a 401k, the only available investments were in mutual funds. But when ETFs were introduced into the marketplace in 1993, they quickly found a place in millions of portfolios due to their advantages over mutual funds, including:
5 Ways ETFs Beat Mutual Funds
Transparency and Liquidity. Since they disclose their holdings every day—unlike mutual funds which are only required to disclose 60 days after the end of a quarter—investors always know which stocks and bonds are in the ETF.
Tax Efficiency. Often, mutual funds need to boost capital for share redemptions or rebalancing their portfolio, which may lead to capital gains—and capital gain taxes for their shareholders. An ETF works more like a stock in that you would incur capital gains only when you sell it, depending on your holding period.
Easy to Trade. ETFs trade like stocks—all day long; whereas mutual funds can only be bought or sold at the close of the market, or 4 p.m. EST.
Generally, Less Expensive than Mutual Funds. With an ETF, you’ll pay a commission to a brokerage house. Mutual funds entail additional costs, which results in an average expense ratio of 0.81% for index funds, while index ETFs average just 0.48%.
No Minimum Investment. Whereas you can purchase one share of an ETF, most funds have a minimum investment, such as $500 to $10,000 or more.
ETFs cover nearly every sector and industry—domestic and international. As of the end of 2023, there were 3,108 ETFs with $8.1 trillion in assets, giving you plenty of investment opportunities!
Additionally, you can purchase broad, index-based ETFs as well as ETFs focused specifically on:
- Stocks
- Bonds
- Commodities
- Precious Metals
- Currencies
- International
- And even cryptocurrencies!
Don’t Buy Just Any ETF; Make Sure It’s the One for You!
And just as with individual stocks, it’s important to evaluate ETFs prior to purchasing them.
Here are a few tips to help you decide whether or not an ETF belongs in your portfolio.
Performance. You can track the performance of ETFs over a period of time, such as three or five years. There are many websites that will do this, but my favorite is Morningstar:
https://www.morningstar.com/topics/etfs?
Expenses. Not all ETFs are created equal. Just because there may be 15 ETFs in one sector, don’t assume they will have similar expense ratios. So, you’ll need to balance out the expenses against the return. You may find that you’ll do better with a slightly higher expense ratio if you can also earn higher returns. You can find this information on the above website also.
Screening for ETFs
Again, there are many sites that will help you with this task, but two of my favorites are:
3 ETF Ideas for You
In my Cabot Money Club portfolio, I hold about 20 ETFs, ranging from broad-based to sector-specific, to a few that focus only on dividend-paying stocks.
From that portfolio, I’ve reviewed and chosen three ideas for you, all highly rated, with attractive returns.
I hope you’ll find at least one that makes sense for your portfolio.
ALPS O’Shares Russell Smallcap Qlty Divd ETF (OUSM)
Top 10 Holdings
| Holdings | % Portfolio Weight | Sector |
| Encompass Health Corp | 2.03 | Healthcare |
| Tradeweb Markets Inc | 1.99 | Financial Services |
| Juniper Networks Inc | 1.99 | Technology |
| Old Republic International Corp | 1.98 | Financial Services |
| Organon & Co Ordinary Shares | 1.97 | Healthcare |
| Lincoln Electric Holdings Inc | 1.95 | Industrials |
| New York Times Co Class A | 1.94 | Communication Services |
| Primerica Inc | 1.92 | Financial Services |
| ITT Inc | 1.9 | Industrials |
| Texas Roadhouse Inc | 1.89 | Consumer Cyclical |
| Total Return % | YTD | 1-Year | 3-Year | 5-Year |
| Total Return % (Price) | 13.03 | 20.52 | 8.93 | 11.29 |
| Total Return % (NAV) | 12.97 | 20.49 | 8.88 | 11.31 |
Source: Morningstar
Dividend Appreciation ETF Vanguard (VIG)
Top 10 Holdings
| Holdings | % Portfolio Weight | Sector |
| Apple Inc | 4.48 | Technology |
| Microsoft Corp | 4.27 | Technology |
| Broadcom Inc | 4.02 | Technology |
| JPMorgan Chase & Co | 3.34 | Financial Services |
| Exxon Mobil Corp | 3 | Energy |
| UnitedHealth Group Inc | 2.7 | Healthcare |
| Visa Inc Class A | 2.27 | Financial Services |
| Procter & Gamble Co | 2.24 | Consumer Defensive |
| Costco Wholesale Corp | 2.17 | Consumer Defensive |
| Mastercard Inc Class A | 2.09 | Financial Services |
| Total Return % | YTD | 1-Year | 3-Year | 5-Year |
| Total Return % (Price) | 11.49 | 15.55 | 7.7 | 11.63 |
| Total Return % (NAV) | 11.56 | 15.59 | 7.73 | 11.64 |
Source: Morningstar
Alps Medical Breakthroughs ETF (SBIO)
Top 10 Holdings
| Holdings | % Portfolio Weight | Sector |
| Krystal Biotech Inc | 3.92 | Healthcare |
| Alkermes PLC | 3.16 | Healthcare |
| Avidity Biosciences Inc Ordinary Shares | 2.97 | Healthcare |
| Crinetics Pharmaceuticals Inc | 2.86 | Healthcare |
| Immunovant Inc | 2.84 | Healthcare |
| Corcept Therapeutics Inc | 2.54 | Healthcare |
| Merus NV | 2.45 | Healthcare |
| Denali Therapeutics Inc | 2.32 | Healthcare |
| Arcellx Inc | 2.22 | Healthcare |
| Xenon Pharmaceuticals Inc | 2.21 | Healthcare |
| Total Return % | YTD | 1-Year | 3-Year | 5-Year |
| Total Return % (Price) | 12.67 | 17.69 | -5.46 | 0.86 |
| Total Return % (NAV) | 12.54 | 17.35 | -5.59 | 0.81 |
Source: Morningstar
To learn more about the ETF investing, see my top picks, and even gain access to our model ETF portfolios, subscribe to Cabot Money Club today!
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