Building Healthy ETF Portfolios: 6 Key Nutrients
The ETF industry is seeing explosive growth, piling up huge assets, with the AUM reaching a milestone of $12.3 trillion at the end of February. To maintain a healthy portfolio, it is necessary to protect it from market gyrations. Ahead of World Health Day, let us examine the supplements for a robust ETF investment portfolio.
Similar to the six vital nutrients required for good health, we have highlighted six requisites for building a healthy ETF portfolio.
Expense Ratio
The expense ratio is significant in determining the returns of an ETF. A fund with a low expense ratio comfortably outperforms its more expensive counterparts if the other factors remain the same. Fortunately, the expense ratio has drastically declined in recent years due to cutthroat competition (read: A Guide to the 25 Cheapest ETFs).
SoFi Select 500 ETF SFY is the cheapest choice in the space, with an expense ratio of 0.00%. SPDR Portfolio S&P 500 ETF (SPLG), JPMorgan BetaBuilders U.S. Equity ETF BBUS and Vanguard Total Stock Market ETF VTI have expense ratios of 0.02%, 0.02% and 0.03%, respectively.
Volume
Volume, or the number of shares traded in a particular period, is definitely the most important consideration for determining the liquidity of a particular fund. An ETF should have enough liquidity in order to easily purchase and sell on the market. A higher volume provides easy access to move in and out of the product, keeping the bid/ask spreads tight. Further, greater volume ensures easy creation and redemption of shares in the fund’s basket, which is a regular and vital mechanism.
While several ETFs trade in higher volumes, SPDR S&P 500 ETF SPY, Financial Select Sector SPDR Fund XLF, Invesco QQQ QQQ and iShares 20+ Year Treasury Bond ETF TLT topped the list of trading volumes. The funds have average daily volumes of 73.6 million, 45.2 million, 44.6 million, and 42.7 million, respectively.
Assets Under Management (AUM)
AUM is the sum of the market value for all of the investments managed by a fund or family of funds. ETFs with the highest AUM tend to have higher trading volume, low expenses and good tracking error. These invest in a broader range of assets, enhancing diversification benefits (read: Global ETFs Soar to Record $12.3 Trillion).
SPY, iShares Core S&P 500 ETF IVV, Vanguard S&P 500 ETF VOO and VTI are the largest ETFs with AUMs of $526.9 billion, $450.4 billion, $432.9 billion and $387.9 billion, respectively.
Diversification
Designing a diversified investment portfolio involves the inclusion of stocks of different companies, securities and industries in order to minimize risks and achieve optimal risk-adjusted returns. While several ETFs offer diversification benefits, Invesco S&P 500 Equal Weight ETF RSP, Direxion NASDAQ-100 Equal Weighted Index Shares QQQE and ALPS Equal Weight Sector ETF EQL seem excellent choices.
RSP offers almost equal allocation of the stocks of the S&P 500 Index, while QQQE provides equal-weight exposure to the cap-weighted Nasdaq-100 Index. Meanwhile, EQL is a relevant choice for investors looking for sector-level diversification.
Blend
Blend funds consist of a mix of both growth and value stocks, and are considered most suitable in any type of market. This is because these funds harness their momentum in earnings to create a positive bias in the market, resulting in improved share prices. At the same time, these tap buying opportunities at depressed stock prices, hoping for capital appreciation when the stock finally reflects its true market price (read: Should You Buy S&P 500 ETFs Now & Hold?).
Among some of the popular blend equity ETFs are SPY, Schwab U.S. Large-Cap ETF SCHX and iShares Russell 1000 ETF IWB.
Dividend
Dividend-paying securities are the major sources of consistent income for investors when returns from the equity market are at risk. Dividend-focused products offer both safety in the form of payouts and stability in the form of mature companies that are less vulnerable to volatility in stock prices.
While several choices are available in the dividend space, Vanguard Dividend Appreciation ETF VIG, Schwab US Dividend Equity ETF SCHD and Vanguard High Dividend Yield Index ETF VYM are some of the most popular ones.
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iShares 20+ Year Treasury Bond ETF (TLT): ETF Research Reports
Invesco QQQ (QQQ): ETF Research Reports
SPDR S&P 500 ETF (SPY): ETF Research Reports
Financial Select Sector SPDR ETF (XLF): ETF Research Reports
SoFi Select 500 ETF (SFY): ETF Research Reports
Vanguard Total Stock Market ETF (VTI): ETF Research Reports
Vanguard Dividend Appreciation ETF (VIG): ETF Research Reports
Vanguard S&P 500 ETF (VOO): ETF Research Reports
Invesco S&P 500 Equal Weight ETF (RSP): ETF Research Reports
iShares Core S&P 500 ETF (IVV): ETF Research Reports
Vanguard High Dividend Yield ETF (VYM): ETF Research Reports
iShares Russell 1000 ETF (IWB): ETF Research Reports
Schwab U.S. Large-Cap ETF (SCHX): ETF Research Reports
ALPS Equal Sector Weight ETF (EQL): ETF Research Reports
Schwab U.S. Dividend Equity ETF (SCHD): ETF Research Reports
Direxion NASDAQ-100 Equal Weighted Index Shares (QQQE): ETF Research Reports
SPDR Portfolio S&P 500 ETF (SPLG): ETF Research Reports
JPMorgan BetaBuilders U.S. Equity ETF (BBUS): ETF Research Reports