There are a lot of ETF’s to invest in and they are a great way to invest especially if you’re starting out because they enable you to automatically have a diversified portfolio without the need to research every single company in the indexed list that it contains. The best ETF is a matter of opinion however there are a number of ETFs that everyone should have in their portfolio especially if they want to grow over wealth and earn a stable dividend income in return.
The best ETF to buy and invest in forever is in my opinion Vanguard’s S&P 500 index which in the UK has the ticker symbol VUSA while in the United States, the ticker symbol is VUSD. Both track the same index but differ slightly due to their associated currencies and geolocations which means that fees and taxes might impact the overall cost. But there are other great ETF’s to consider such as the FTSE 100 and 250, the VBK (Vanguard Small-Cap Growth) and the iShares Global Clean Energy (INRG). These ticker symbols are relative to my trading platform, Trading212.
In this post, we are going to look at some of the top ETFs to invest in that you could potentially hold for life. We’ll also look at how to pick an ETF so you can keep picking the best ones. Read on to find out more.
What is an ETF
ETF stands for Exchange Traded Funds and is a collection of selected companies whose performance is tracked. Therefore if you invest in an ETF, you won’t actually own the stocks with the list of companies that the ETF tracks but you will still receive the benefits of owning those companies. For example, if those companies pay a dividend, then you’ll receive dividends in return. These won’t be the same dividend as if you’re getting it from the company directly, rather the dividend is paid to the ETF who then pay out its own yield percentage.
An ETF is able to be traded at all times throughout the trading day as opposed to an index fund which is similar to an ETF however an index fund only allows you to trade at certain times usually at the close of the market. I’ve written about the differences between ETF vs Index funds in detail in this post which you can read to help you decide which one is better for you.
How To Pick An ETF
When choosing an ETF there are a number of steps to take:
- Firstly you need to identify the companies that the ETF has and determine which sectors it invests most in. Most ETF’s will have a large portion of a certain industry for example the S&P 500 has a large percentage of holdings in the technology sector while the Vanguard Small-Cap Growth ETF has its majority holding in the healthcare industry. Although most ETF’s are well-diversified you should have a look to see what holdings are the majority.
- Secondly, you need to consider the fees and taxes associated with the ETF’s as they can impact the profits from your portfolio. You might even want to consider which platform you use because some platforms will have better rates than others. A cost that most investors forget about is the FX rate. If you’re living in the Uk and investing in a USA based ETF like the S&P 500 then you will also incur exchange fees from your trading platform and lose out depending on the exchange rate.
The Best ETF’s to choose from
There are a number of great ETF’s but the one’s that I like are the following:
S&P 500 (VUSA or VUSD)
In my opinion, this is the best ETF there is from my experience as it has performed very well over many years and even great investors such as Warren Buffet support it. There are approximately 503 different companies in the S&P 500, hence the name, from a wide range of different industries. These are American bluechip companies whose performance is tracked which means that as the collective values of the companies increases, the value of the ETF also increases.
The S&P is made up of a large number of Information & Technology (25%) companies such as Apple and Microsoft but there is also a large exposure to companies in the Healthcare sector (15%), Communications Services (10%), Financials (10%), Consumer Discretionary (10%) and many others. The larger holding on Information and Technology is, without doubt, one of the reasons why the S&P 500 has performed so well over the last 5 years as these companies have had exponential growth levels boosted by the Covid-19 pandemic.
The fees are also very low, which if you invest via the Vanguard platform it’s only 0.04% but you can trade with trading platforms such as Trading212 which will further reduce the fees and also allow you to buy fractional shares which aren’t possible on Vanguard.
Over the last 5 years, the S&P 500 has grown by over 100% which make it one of the best and most desirable ETF’s for any investor to have in their portfolio.
FTSE 100 and 250 (VUKE and VMIG)
The Uk market has been a bit of a stop-start especially since the global outbreak of Covid-19 which really halted all markets but affected some more than others. The value of the UK pound (GBP) was affected quite adversely which also then affected the value of this ETF as it is comprised of a collection of the UK’s top 100 companies for the FTSE 100 and the next top 250 companies after the first 100 for the FTSE 250.
The companies in the FTSE 100 number 100 and include top British based companies such as Shell, HSBC, Unilever and much more while the FTSE 250 include upcoming companies such as Aston Martin, Centamin, Dunhelm and much more. If you live in the UK, you’ll know that all of these companies are already household names.
The pandemic and Brexit had a negative impact however, the UK economy has resisted collapse and due to this, the value of the FTSE 100 and 250 has been increasing. the value of the GBP is also increasing against the US dollar and the Euro.
Over the last 5 years, the FTSE 100 and 250 have grown consistently with the FTSE 250 outperforming the FTSE 100 by over 20%.
Vanguard Small-Cap Growth (VBK)
This fund tracks over 600 stocks and is named the small-cap growth fund because it tracks companies that are smaller in comparison to companies in the S&P 500 but the value of the companies is still large which is anything between $300 million to $2 billion. Therefore the company size within the fund can vary and growth levels can be quite high.
Companies included in the ETF are largely in the healthcare and technology sector which together makes up more than 40% of its holdings. However, the holdings of each company are less than 1% meaning that if one of the companies falls in performance or collapses, then the ETF isn’t very heavily affected. The risk associated with this ETF is thus relatively low.
Over the last 5 years, the Vanguard Small-Cap Growth ETF has had similar growth levels as the S&P 500 but has beaten it by more than 20% and usually returns about 9% returns annually. That’s a great return!
This is a great ETF because because it invests in companies that are focused on generated clean energy however it is also a much smaller ETF compared to all the others as it only has approximately 30 companies in its list. This may only be temporary becasue more compnaies are recognising that they need to be environmentally consciuos therefore this small list of 30 can grow to include almost all the compnaies in the S&P 500 over the next 10-20 years.
Investing in this ETF is not only for the benefit of the environment as the rapid growth of this ETF is evident by the 150% increase it has seen over the last 5 years. therefore it is a financially viable ETF to have in your portfolio. I love it!
Why you should invest in ETF’s
Warren Buffet said that investing in ETF’s and Index funds are the best way for everyday investors to start investing and he really likes the S&P 500 in particular. Some of the reasons why you should invest in ETF’s are:
- It gives you an automatically diversified portfolio of companies that have been selected by professional wealth managers. These ETF’s are highly diversified so the risk of investing is spread evenly.
- You get the same benefits of owning the stocks at a cheaper rate even though you’re not actually owning them for example, you’ll see growth and if dividends are paid, you’ll receive dividends. Buying one share in Apple (AAPL) costs on average $130 but owning one slice of the S&P500 which includes Apple as many other companies cost a much lower $80 (or £57) which is much more affordable.
- You don’t have to actively manage your portfolio as when a company underperforms, the fund managers who are in charge of the ETF’s will remove that company from the fund and replace it with another. Investing in ETF’s is one of the most passive forms of investing.
The risks of investing in ETF’s
Investing in an ETF like many investments carries risks however there are some risks that apply a lot more to an ETF than an individual stock. The two most common are:
- ETF’s can be volatile depending on the one that you choose. The S&P500 is fairly stable as it’s built up of a number of bluechip companies however the iShares Global Clean Energy, in particular, is a great ETF however it’s very new and adoption can take time. Therefore the price might fluctuate both up and down. However other ETF’s such as real estate and gaming can be seasonal so they can vary in price depending on the time of year.
- The dividend payouts from ETF’s can also vary. Although the payout is regular, the amount received can be different every quarter since companies change their dividend yields and payout ratios. Therefore it might not be a reliable source of income as sometimes companies can also stop their dividends so you’ll earn less.
ETF’s are a great investment especially if you want to invest passively as they are managed for you by a fund manager. The benefits are also great as you receive the same rewards as you would if you were to buy individual stocks without the heavy price of paying for all those individual stocks.
The most popular ETF is the S&P 500 which I believe is also the best as it will give you a great return every year as it has done for the past 5-10 years. I’ll leave you with the following three key points:
- ETF are already a diversified portfolio as it contains a wide range of companies from different sectors. But only investing in ETF’s can limit the growth of your portfolio. This is why you should probably consider investing in more than one.
- The above list is not exhaustive of the best ETF’s and you might not agree however they are the best from my own experience of investing in them. What works for me, might not work for you so please do your own research when making investing decisions.
- ETF’s can be volatile so there is a great risk of losing money but also a great reward of earning money.
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