Exchange-traded funds (ETFs) allow investors to buy a collection of stocks or other assets in a single fund with (usually) low expenses and trade on an exchange such as stocks. ETFs have become tremendously popular over the past decade and now hold trillions of dollars in assets. With literally thousands of ETFs to choose from, where does an investor start? Below are some of the best ETFs by category, including some highly specialized funds.
What is an ETF and how does it work?
An exchange-traded fund can hold positions in many different assets, including stocks, bonds, and sometimes commodities. ETFs often track a specific index such as the Standard & Poor’s 500 or Nasdaq 100, which means they hold positions in index companies at the same relative weights in the index. So, by buying a share of the ETF, an investor actually buys a (small) share of all the assets held in the fund.
ETFs are often themed around a specific collection of stocks. An S&P 500 index fund is one of the most popular themes, but themes also include value or growth stocks, dividend-paying stocks, country-based investments, disruptive technologies, specific sectors such as information technology or healthcare, various bond maturities (short, medium and long) and many more.
For managing an ETF, the fund company charges a fee called an expense ratio. The expense ratio is the annual percentage of the total investment in the fund. For example, an ETF might charge a 0.12% fee. This means that on an annual basis an investor would pay $12 for every $10,000 invested in the fund. Low-cost ETFs are very popular among investors.
The best ETFs of July 2022 by type:
Best Equity ETFs
Equity ETFs provide exposure to a portfolio of publicly traded stocks and can be divided into different categories based on where the stock is listed, the size of the company, whether it pays a dividend, or in which sector it is located. So investors can find the type of equity funds they want exposure to and only buy stocks that meet certain criteria.
Equity ETFs tend to be more volatile than other types of investments such as CDs or bonds, but they are suitable for long-term investors looking to create wealth. Some of the most popular equity ETF sectors and their historical performance (as of June 29, 2022) include:
Best US Market Capitalization Indice ETFs
This type of ETF gives investors broad exposure to publicly traded companies listed on AMERICAN exchanges using a passive investment approach that tracks an important index such as the S&P 500 or Nasdaq 100.
Vanguard S&P 500 ETF (VOO)
- Year-to-date performance 2022: -19.4%
- Historical performance (annual over 5 years): 11.3%
- Expense ratio: 0.03 percent
Some of the most extensively held ETFs in this group also include SPDR S&P 500 Trust (SPY), iShares Core S&P 500 ETF (IVV) and Invesco QQQ Trust (QQQ).
The best international ETFs
This type of ETF can provide targeted exposure to internationally traded companies in general or by more specific geographical area, such as Asia, Europe or emerging markets. Investing in foreign companies introduces concerns such as currency risk and governance risks, since foreign countries may not offer investors the same protections as the United States.
Vanguard FTSE Developed Markets ETF (VEA)
- Year-to-date performance 2022: -18.5%
- Historical performance (annual over 5 years): 2.9 percent
- Expense ratio: 0.05 percent
Some of the popular ETFs also include iShares Core MSCI EAFE ETF (IEFA), Vanguard FTSE Emerging Markets ETF (VWO) and Vanguard Total International Stock ETF (VXUS).
Major sector ETFs
This type of ETF offers investors a way to buy stocks in specific sectors, such as consumer staples, energy, financials, healthcare, technology, and more. These ETFs are typically passive, which means they track a specific preset index of stocks and simply mechanically follow the index.
Vanguard Information Technology ETF (VGT)
- Year-to-date performance 2022: -27.5%
- Historical performance (annual over 5 years): 19.8 percent
- Expense ratio: 0.10 percent
Some of the most widely held ETFs also include Financial Select Sector SPDR Fund (XLF), Energy Select Sector SPDR Fund (XLE) and Industrial Select Sector SPDR Fund (XLI).
This type of ETF offers investors a way to buy only stocks that pay a dividend. A dividend ETF is usually passively managed, which means it mechanically tracks an index of dividend-paying companies. This type of ETF is usually more stable than a total market ETF and can be attractive to those looking for income-producing investments, such as retirees.
The best dividend ETFs tend to offer higher returns and lower costs.
Vanguard Dividend Appreciation ETF (VIG)
- Year-to-date performance 2022: -15.6%
- Historical performance (annual over 5 years): 11.2%
- Expense ratio: 0.06 percent
Some of the most widely held ETFs here also include) Vanguard High Dividend Yield Index ETF (VYM) and Schwab U.S. Dividend Equity ETF (SCHD).
The best bond ETFs
A bond ETF provides exposure to a portfolio of bonds, which are often divided into subsectors depending on the type of bond, their issuer, maturity and other factors, allowing investors to buy exactly the type of bonds they want. Bonds pay interest according to a schedule, and the ETF transfers this income to the holders.
Bond ETFs can be an attractive participation for those who need the security of a regular income, such as retirees. Some of the most popular bond eTF sectors and their returns include:
Long-term bond ETFs
This type of bond ETF offers exposure to bonds with a long maturity, perhaps up to 30 years. Long-term bond ETFs are more exposed to changes in interest rates, so if rates move higher or lower, these ETFs will inversely move in the direction of rates. While these ETFs can pay a higher return than short-term bond ETFs, many do not see the reward as riskworthy.
iShares MBS ETF (MBB)
- Year-to-date performance 2022: -9.1%
- Historical performance (annual over 5 years): 0.2%
- Expense ratio: 0.04 percent
Some of the most extensively held ETFs also include iShares 20+ Year Treasury Bond ETF (TLT) and Vanguard Mortgage-Backed Securities ETF (VMBS).
Short-term bond ETFs
This type of bond ETF offers exposure to bonds with a short maturity, typically no more than a few years. These bond ETFs won’t move much in response to changes in interest rates, which means they’re relatively low-risk. These ETFs can be a more attractive option than directly owning bonds because the fund is highly liquid and more diversified than any single bond.
Vanguard Short-Term Bond ETF (BSV)
- Year-to-date performance 2022: -4.8%
- Historical performance (annual over 5 years): 1.0%
- Expense ratio: 0.04 percent
Some of the most widely held ETFs in this category also include iShares 1-3 Year Treasury Bond ETF (SHY) and Vanguard Short-Term Treasury ETF (VGSH).
Total bond market ETFs
This type of bond ETF offers investors exposure to a wide selection of bonds, diversified by type, issuer, maturity and region. A total bond market ETF offers a way to gain broad bond exposure without going too heavy in one direction, making it a way to diversify a heavy equity portfolio.
Vanguard Total Bond Market ETF (BND)
- Year-to-date performance 2022: -11.2%
- Historical performance (annual over 5 years): 0.6 percent
- Expense ratio: 0.03 percent
Some of the most extensively held ETFs also include iShares Core U.S. Aggregate Bond ETF (AGG) and Vanguard Total International Bond ETF (BNDX).
Municipal Bond ETFs
This type of bond ETF offers exposure to bonds issued by states and cities, and the interest on these bonds is typically tax-free, although it is lower than that paid by other issuers. Muni bonds have traditionally been one of the safest areas of the bond market, although if you own out-of-state munis in a fund, you will lose tax benefits in your home state, even if not at the federal level. Given the tax advantages, it is advantageous to consider a municipal bond ETF that invests in your state of residence.
iShares National Muni Bond ETF (MUB)
- Year-to-date performance 2022: -8.5%
- Historical performance (annual over 5 years): 1.3%
- Expense ratio: 0.07 percent
Some of the most extensively held ETFs also include Vanguard Tax-Exempt Bond ETF (VTEB) and iShares Short-Term National Muni Bond ETF (SUB).
Top Balanced ETFs
A balanced ETF owns both stocks and bonds and aims for some exposure to stocks, which is often reflected in its name. These funds allow investors to have the long-term returns of stocks, while reducing some of the risk with bonds, which tend to be more stable. A balanced ETF may be best suited for long-term investors who may be a little more cautious but need growth in their portfolio.
iShares Core Aggressive Allocation ETF (AOA)
- Year-to-date performance 2022: -17.2%
- Historical performance (annual over 5 years): 5.9%
- Expense ratio: 0.15 percent
Some of the most popular balanced ETFs also include the iShares Core Growth Allocation ETF (AOR) and the iShares Core Moderate Allocation ETF (AOM).
Best Commodity ETFs
A commodity ETF offers investors a way to own specific commodities, including agricultural products, oil, precious metals, and others without having to transact in futures markets. The ETF can own the commodity directly or through futures contracts. Commodities tend to be quite volatile, so they may not be suitable for all investors. However, these ETFs can allow more advanced investors to diversify their holdings, hedge exposure to a certain commodity in their other investments, or make a directional bet on the price of a certain commodity. Best performing gold ETFs tend to offer highly effective portfolio diversification with defensive reserves of added value.
SPDR Gold (GLD) Shares
- Year-to-date performance 2022: -0.9%
- Historical performance (annual over 5 years): 7.5%
- Expense ratio: 0.40 percent
Some of the most widely held commodity ETFs also include iShares Silver Trust (SLV), United States Oil Fund LP (USO) and Invesco DB Agriculture Fund (DBA).
Best Currency ETFs
A currency ETF gives investors exposure to a specific currency simply by buying an ETF rather than accessing the foreign exchange (forex) markets. Investors can access some of the most traded currencies in the world, including the US dollar, euro, British pound, Swiss franc, Japanese yen and more. These ETFs are best suited for advanced investors who may be looking for a way to hedge exposure to a specific currency in their other investments or simply to make a directional bet on the value of a currency.
Invesco DB US Dollar Index Bullish Fund (UUP)
- Year-to-date performance 2022: 9.4%
- Historical performance (annual over 5 years): 3.2%
- Expense ratio: 0.75 percent
Some of the most popular currency ETFs also include Invesco CurrencyShares Euro Trust (FXE) and Invesco CurrencyShares Swiss Franc Trust (FXF).
The best real estate ETFs (REIT ETFs)
Real estate ETFs usually focus on holding stocks classified as REITs or real estate investment funds. REITs are a convenient way to own an interest in companies that own and manage real estate, and REITs operate in many sectors of the market, including residential, commercial, industrial, housing, cell towers, medical buildings, and more. REITs typically pay substantial dividends, which are then transferred to the ETF holders. These payments make REITs and REITs ETFs particularly popular among those in need of income, especially retirees. The best ETFs REITs maximize dividend yields, as dividends are the main reason to invest in them.
Vanguard Real Estate ETF (VNQ)
- Year-to-date performance 2022: -20.4%
- Historical performance (annual over 5 years): 5.7 percent
- Expense ratio: 0.12 percent
Some of the most extensively held real estate ETFs also include iShares U.S. Real Estate ETF (IYR) and Schwab U.S. REIT ETF (SCHH).
The best volatility ETFs
ETFs even allow investors to bet on stock market volatility through what are called volatility ETFs. Volatility is measured by the CBOE volatility index, commonly known as VIX. Volatility usually increases when the market is falling and investors become uncomfortable, so a volatility ETF can be a way to hedge your investment in the market, helping to protect it. Because of how they are structured, they are more suitable for traders looking for short-term movements in the market, not for long-term investors looking to profit from increased volatility.
iPath Series B S&P 500 VIX Short-Term Futures (VXX)
- Year-to-date performance 2022: 22.9%
- Historical performance (annual over 3 years): -39.7 percent
- Expense ratio: 0.89 percent
Some of the most popular volatility ETFs also include the ProShares VIX Mid-Term Futures ETF (VIXM) and the ProShares Short VIX Short-Term Futures ETF (SVXY).
The best leveraged ETFs
A leveraged ETF increases in value faster than the index it is tracking, and a leveraged ETF can aim for a gain that is two to even three times higher than the daily return of its index. For example, a triple-leveraged ETF based on the S&P 500 is expected to rise 3% on a day when the index rises 1%. A double-leveraged ETF would aim for a double return. Because of how leveraged ETFs are structured, they are better suited for traders looking for short-term returns on the target index in a few days, rather than for long-term investors.
ProShares UltraPro QQQ (TQQQ)
- Year-to-date performance 2022: -70.1%
- Historical performance (annual over 5 years): 25.0%
- Expense ratio: 0.95 percent
Some of the most widely held leveraged ETFs also include ProShares Ultra QQQ (QLD), Direxion Daily Semiconductor Bull 3x Shares (SOXL) and ProShares Ultra S&P 500 (SSO).
Best Reverse ETFs
Reverse ETFs increase in value when the market declines and allow investors to buy a fund that inversely tracks a specific index such as the S&P 500 or Nasdaq 100. These ETFs can target the exact reverse performance of the index, or they can try to offer two or three times the performance, like a leveraged ETF. For example, if the S&P 500 fell 2% in one day, a triple inverse should increase by about 6% that day. Because of how they are structured, inverse ETFs are best suited for traders looking to capitalize on an index’s short-term declines.
ProShares Short S&P 500 ETF (SH)
- Year-to-date performance 2022: 20.0%
- Historical performance (annual over 5 years): -12.9 percent
- Expense ratio: 0.88 percent
Some of the most popular inverse ETFs also include ProShares UltraPro Short QQQ (SQQQ) and ProShares UltraShort S&P 500 (SDS).
How to invest in ETFs
It is relatively easy to invest in ETFs and this fact makes them popular among investors. You can buy them and sell them on the stock exchange like a regular stock. Here’s how to invest in an ETF:
1. Find which ETF you want to buy
You have a choice of over 2,000 ETFs traded in the US, so you’ll need to sift through the funds to determine which one you want to buy.
A good option is to buy an index fund based on the S&P 500, since it includes the best publicly traded stocks listed in the United States (in addition, it is the recommendation of super investor Warren Buffett). But other broad-based index funds can also be a good choice, reducing (but not eliminating) investment risk. Many companies offer similar index funds, so compare the expense ratio on each to see which one offers the best offer.
Once you’ve found a fund to invest in, write down its ticker symbol, a three- or four-letter code.
2. Find out how much you can invest
Now determine how much you are able to invest in the ETF. You may have a specific amount at your disposal now that you want to put on the market. But what you can invest can also depend on the price of the ETF.
An ETF can be traded at a price of $10 or $15 or maybe even a few hundred dollars per share. Generally, you’ll need to buy at least one entire stock when you place an order. However, if you use a broker that allows fractional stocks, you can put any amount of money to work, regardless of the price of the ETF. In many cases these brokers do not even charge a trading fee.
Fortunes are built over the years, so it’s important to keep adding money to the market over time. So you should also determine how much you can regularly add to the market over time.
3. Place your order with your broker
Now it’s time to place your order with your broker. If you already have money in your account, you can place the trade using the ETF’s ticker symbol. If not, deposit money into the account and then trade when the money is deleted.
If you don’t have a brokerage account, it usually only takes a few minutes to set up one. A handful of brokers like Robinhood and Webull allow you to fund your account instantly. So in some cases you could be started and do full trading in a matter of minutes.
Protect yourself from inflation with ETFs
Inflation is the persistent increase in prices over time and gradually reduces purchasing power. With the reopening of the economy following the closure of COVID-19, businesses and consumers have rushed to spend, pushing the prices of many goods and services higher. To protect yourself from inflation, you need investments that increase faster than they do. And one way to do this is to actually own the businesses – or the stocks in them – that benefit from inflation.
Often the beneficiary is a high-quality company that can push on those rising prices for consumers. By owning a stake in the company – through stocks or a collection of shares in an ETF – you can take advantage when your companies raise their prices. So owning stocks can be a way to protect yourself from inflation.
Investors have a good choice of ETFs when it comes to hedging against inflation. Two of the most popular ETFs include index funds based on the Standard & Poor’s 500 Index and the Nasdaq 100 Index, which contain high-quality companies listed on American stock exchanges:
- Vanguard S&P 500 ETF (VOO), with an expense ratio of 0.03%
- Invesco QQQ Trust (QQQ), with an expense ratio of 0.20%
Both are low-cost funds that give you stakes in some of the best companies in the world, helping you protect yourself from inflation.
What to know about cryptocurrencies and ETFs in 2022
Currently, there are no ETFs that allow you to invest directly in Bitcoin or other cryptocurrencies. Several companies, including Fidelity, have applied to the Securities and Exchange Commission (SEC) to offer Bitcoin ETFs, but the agency has been slow to approve them. In a recent statement, the SEC questioned whether the Bitcoin futures market could support the entry of ETFs, which are unable to limit further investor activity if a fund were to become too large or dominant.
However, there are ETFs that invest in companies that use the technology behind Bitcoin, known as blockchain. These ETFs hold shares in companies such as Microsoft, PayPal, Mastercard, and Square. All of these companies use blockchain technology in different parts of their business. One thing these ETFs don’t give you is direct exposure to Bitcoin itself, but as blockchain technology continues to grow, the companies in these ETFs could benefit.
It is unclear when or if ETFs that invest directly in Bitcoin or other cryptocurrencies will be available for purchase. It is important to remember that cryptocurrencies are highly speculative investments and do not produce anything for their owners. ETFs that focus on blockchain can ultimately be a safer way to profit from its future innovation.
Frequently Asked Questions about Exchange Traded Funds (ETFs)
Are ETFs a good type of investment?
ETFs are a good type of investment because of the benefits they offer to investors, and ETFs can generate significant returns for investors, if they select the right funds.
ETFs offer several benefits to investors, including the ability to buy multiple assets in a single fund, diversification benefits for risk reduction, and the generally low costs of managing the fund. Cheaper funds are generally passively managed and can cost only a few dollars a year for every $10,000 invested. In addition, passively managed ETFs often perform much better than actively managed ETFs.
The return of a single ETF is completely dependent on the stocks, bonds and other assets it owns. If these assets increase in value, the ETF will also increase in value. If assets fall, the ETF will also decline. The performance of the ETF is only the weighted average of the return on its holdings.
So not all ETFs are created equal, which is why it’s important to know what your ETF owns.
What is the difference between ETFs and stocks?
An ETF can hold holding holdings in many different types of assets, including stocks and bonds. In contrast, a security is a property interest in a specific company. While some ETFs are made up entirely of stocks, an ETF and a security behave differently:
- Stocks usually fluctuate more than ETFs. A single stock usually moves much more than an ETF. This means that you could earn or lose more money on a single stock than you would on an ETF.
- ETFs are more diversified. By buying a stock ETF you are harnessing the power of diversification, putting your eggs in many different stocks rather than just one stock or a few individual stocks. This helps reduce the risk over time.
- The returns of a stock ETF depend on many companies, not just one. The performance of an ETF depends on the weighted average performance of its investments, while with a single security the return depends entirely on the performance of that company.
These differences are among the most important between ETFs and stocks.
What is the difference between ETFs and mutual funds?
ETFs and mutual funds both have similar structures and advantages. Both can offer a pool of investments such as stocks and bonds, reduced risk due to diversification (compared to individual equity holdings or a portfolio of a few securities), low management fees, and the potential for attractive returns.
But these two types of funds differ in a few key ways:
- ETFs are usually passive investments. Most ETFs usually only follow a predetermined index, investing mechanically based on whatever is in the index. In contrast, mutual funds are often actively managed, which means that a fund manager is investing the money, ideally to try to beat the market. Research shows that in the long run passive management usually wins.
- ETFs are often cheaper than mutual funds. Passive investing is cheaper to set up than active management, where the fund company has to pay a team of experts to analyze the market. As a result, ETFs are cheaper than mutual funds as a whole, although passively managed index mutual funds may be cheaper than ETFs.
- Fees can be higher with mutual funds. Today, virtually all major online brokers do not charge a fee to buy ETFs. In contrast, many mutual funds have a selling fee, depending on the brokerage, although many are offered even without trading fees, too.
- ETFs have no sell loads. Sometimes mutual funds can have a selling load, which is an additional fee for the seller. These funds can be 1 or even 2% of your total investment, hurting your returns. ETFs do not have these fees.
- You can trade ETFs whenever the market is open. ETFs are traded like stocks on the stock exchange, and you can place an order during the trading day and know exactly the price you’re paying. In contrast, a mutual fund is valued after the market closes and only then are the shares traded.
- Mutual funds may be forced to make a taxable distribution. At the end of the year, mutual funds may have to make a capital gains distribution, which is taxable to their shareholders, even if they have not sold the fund. This is not the case with ETFs.
These are some of the biggest differences between ETFs and mutual funds, although both achieve the same goal of providing investors with a diversified investment fund. While it may seem that ETFs are clearly better, sometimes mutual funds are the best choice for low costs.
Are ETFs safe for beginners?
ETFs are a good choice for beginners who don’t have much investment experience in the markets. But if the ETF is investing in market-based assets like stocks and bonds, it can lose money. These investments are not insured against losses by the government.
But ETFs can offer a lot to beginners and even more experienced investors who don’t want to analyze investments or invest in individual stocks. For example, rather than trying to choose winning stocks, you could simply buy an index fund and own a piece of many of the best companies.
By investing in many assets, sometimes hundreds, ETFs offer the benefits of diversification, reducing (but not eliminating) risk for investors, compared to simply owning a handful of assets.
So ETFs, depending on what they are invested in, can be a safe choice for beginners.
When can you sell ETFs?
One of the great advantages of ETFs is their liquidity, which means they are easily converted into cash. Investors can buy and sell their funds on any day when the market is open.
That said, there is no guarantee that you can get what you paid for the investment.
Do ETFs have disadvantages?
ETFs have some disadvantages, but they are usually not too significant:
- The ETF is only as good as its holdings. If the ETF has poorly performing assets, it will perform poorly. The structure of the ETF cannot turn lead into gold.
- ETFs will not be the best performing. Due to their diversified nature, ETFs will never be among the best performing investments. For example, an automotive industry ETF will never surpass the single best-performing automotive manufacturer.
- ETFs may not be as focused as they seem. Some ETFs say they give you exposure to a certain country or sector (such as blockchain ETFs). In fact, many of the companies included in these ETFs derive substantial portions of their earnings from outside the target area. For example, an ETF that focuses on Europe may include BMW, even if the German automaker generates huge sales around the world. So an ETF can be much less focused on a certain investment niche than its name would make you believe.
For these reasons, we recommend that you understand which assets a particular ETF owns and whether it is the one you actually want to own when you buy the ETF.