Investing in ETFs has become extremely popular among young investors over the past few years. Perhaps the biggest benefit ETFs provide for beginner investors is the hedge against risks and exposure to a wider variety of stocks that are expensive and often out of reach for average investors. A research paper entitled Exchange-Traded Funds: A New Investment Option for Taxable Investors mentions some interesting data points about ETFs which show their popularity.
The research paper says that ETFs were first introduced in 1993 and in just about 8 years they held a whopping $79 billion in assets. The paper said that within a few years the assets held through ETFs will rival the assets held in equity index funds.
Another detailed report by JPMorgan shares some interesting facts about the rising popularity of ETFs. The report said that ETF assets have grown by about 34% each year over the past two decades.
The report said that with assets worth about $6.1 trillion, ETFs are on their way to becoming “household products” just like mutual funds. The report also takes a look at the reasons behind the popularity of ETFs. The top reason identified by the report is that ETFs are tax-friendly and cost-effective. They also provide flexibility and exposure to almost all the markets around the world. You name a segment or a market and there would be an ETF for that.
The JPMorgan report also shares some data points that show that ETFs are now becoming major parts of investor portfolios around the world. For example, back in 2015, about 19% of investor portfolios were occupied by ETFs. That figure jumped to 20% in 2020 and was expected to reach 38% by 2025. Amid rising volatility and risks in the markets more and more investors and institutional investors are increasing their exposure to ETFs. The report also shares some data on how institutional investors are embracing ETFs. It says:
“If you have a pension, it’s possible your money has been invested in ETFs since as far back as 1993. That’s because pensions and other institutions were among the first to embrace ETFs. As their use grew over time, it gave everyday people comfort and confidence to know they could own the same strategies as the world’s largest, most sophisticated investors. So how are institutions currently using ETFs? More than 90% invest in U.S. stock ETFs and about three-fourths own international stock ETFs. Use of bond ETFs isn’t as high but is rising rapidly as more choices become available and more investors discover their benefits. ETFs’ roles in portfolios are expanding as they grow in popularity. Institutions are now using them as both core holdings and as tools for meeting specific needs, such as fine-tuning portfolio positions or filling in missing pieces.”
ETFs as a Source of Stability
A research report from BlackRock back in 2020 analyzed the performance of ETFs in that turbulent year in the backdrop of the coronavirus crisis. The report, entitled Lessons from COVID-19: ETFs as a Source of Stability, said that the COVID-19 pandemic presented one of the biggest tests for the broader ETF market. And ETFs proved their mettle during the crisis. When global markets were experiencing high volatility, ETFs were a source of stability for investors, according to the report. The report added that on the most volatile trading days in 2020, secondary market trading of ETFs accounted for about 34% of all cash equity trading across Europe and 41% in the US, compared to daily average trading volumes of month in 2019.
Another significant benefit of ETFs is their link with sector investing. Rising inflation, interest rates and the subsequent market downturn of 2022 highlighted the power of sector investing: if you want to prepare for recessions and downturns having exposure to the broader recession-proof sectors like consumer defensive and utilities could save you from market volatility. If you want to gain from market optimism and latest technological advances and bubbles like AI and automation, gain exposure to the technology sector. Instead of using a stock by stock approach, focus on broader sectors. A report by State Street Global Advisors explains the same link in its report entitled Harness the Power of Sector Investing with ETFs. The report says that investing through sectors helps investors lower risks since sector investments offer “lower concentration risk than individual stocks and can help to avoid the idiosyncratic risk associated with single-stock investing.”
But how does sector investing align with ETFs? The report says:
“We believe a large portion of the inflows into sector ETFs can be explained by the index investment revolution. Additionally, there is also a growing appreciation for the potential benefits of sector investing, such as the ability to target exposures and link to macroeconomic trends. More specifically, we have seen investors embrace sector ETFs as a way to express investment views around key events and trends, such as the US presidential election, rising Fed rates or evolving technology.”
Best Vanguard ETFs for Portfolio Diversification
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Best Vanguard ETFs for Portfolio Diversification
12. Vanguard 500 Index Fund ETF (NYSE:VOO)
Vanguard 500 Index Fund ETF (NYSE:VOO) gives exposure to the S&P 500 index. Investing in the ETF sets you up to gain from the broader market rally whenever it happens. Over the past one year Vanguard 500 Index Fund ETF (NYSE:VOO) is up about 15%. Some of the top holdings of the ETF include Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and Nvidia (NASDAQ:NVDA). All these stocks are mega-cap companies with expensive share prices. Investing in VOO hedges against risk since the ETF gives exposure to about 506 companies.
11. Vanguard Financials Index Fund ETF (NYSE:VFH)
Vanguard Financials Index Fund ETF (NYSE:VFH) gives you exposure to some of the biggest financial stocks in the US. Stocks like Visa (NYSE:V), Bank of America (NYSE:BAC), JPMorgan (NYSE:JPM), Mastercard (NYSE:MA), Wells Fargo (NYSE:WFC), Goldman Sachs (NYSE:GSBD), Morgan Stanley (NYSE:MS), among many others.
The ETF is up about 4% over the past one year.
10. Vanguard Emerging Markets Stock Index Fund ETF (NYSE:VWO)
Time and again emerging markets have proven their mettle even during difficult times. Some of the most innovative companies that are expected to become mega-cap names in the future are trading in the emerging markets. A report by Goldman Sachs predicts that the stock market capitalization of emerging markets is set to overtake that of the US by 2030.
“Our economists project EMs’ share of the global equity market will rise from around 27% currently to 35% in 2030, 47% in 2050, and 55% in 2075. India is expected to have the largest increase in global market cap share — from a little under 3% in 2022 to 8% in 2050, and 12% in 2075 — reflecting a favorable demographic outlook and rapid growth in GDP per capita,” according to a report by Goldman.
Vanguard Emerging Markets Stock Index Fund ETF (NYSE:VWO) is one of the best ETFs to gain exposure to emerging markets. Some notable holdings of the fund include Taiwan Semiconductor (NYSE:TSM), Alibaba (NYSE:BABA) and Tencent (NYSE:TME).
9. Vanguard Total Stock Market Index Fund ETF (NYSE:VTI)
Vanguard Total Stock Market Index Fund ETF (NYSE:VTI) is one of the most popular ETFs among investing circles online where wise investors talk about options to diversify their portfolios. Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOG), Tesla (NASDAQ:TSLA), Meta Platforms (NASDAQ:META), Berkshire (NYSE:BRK-B), among others, are some of the top holdings of the ETF. Vanguard Total Stock Market Index Fund ETF (NYSE:VTI) is up about 14% year to date through September 5.
8. Vanguard Growth Index Fund ETF (NYSE:VUG)
Vanguard Growth Index Fund ETF (NYSE:VUG) gives you exposure to some of the biggest growth stocks in the US. The ETF consists of about 235 stocks. Apple (NASDAQ:AAPL) is the ETF’s biggest holding.
As of the end of the second quarter of 2023, 135 hedge funds tracked by Insider Monkey had stakes in Apple (NASDAQ:AAPL). The biggest stakeholder of Apple (NASDAQ:AAPL) during this period was Warren Buffett’s Berkshire Hathaway which owns a $178 billion stake in the company.
7. Vanguard High Dividend Yield ETF (NYSE:VYM)
Vanguard High Dividend Yield ETF (NYSE:VYM) is one of the best Vanguard ETFs for portfolio diversification. The ETF’s goal is to have exposure to companies with above average dividend yields. The ETF’s top holdings include some of the best dividend stocks like Johnson & Johnson (NYSE:JNJ), Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX), The Home Depot, Inc. (NYSE:HD), JPMorgan Chase & Co. (NYSE:JPM), among others. These stocks have high yields and strong dividend growth history.
6. Vanguard Small-Cap Index Fund ETF (NYSE:VB)
Investing in small-cap stocks has proven to be more effective than investing in large-cap firms over longer time periods, according to several studies. Vanguard Small-Cap Index Fund ETF (NYSE:VB) tracks the performance of the US Small Cap Index, which measures the investment return of small-capitalization stocks.
Among the top holdings of the ETF are Fair Isaac Corporation (NYSE:FICO), a California-based software company; Targa Resources Corp. (NYSE:TRGP), a Fortune 500 energy company; Builders FirstSource Inc. (NASDAQ:BLDR), a building materials company; and many others.
In the next part we'll talk about some other top ETFs that give you exposure to some of the best companies in the US, including Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and Nvidia (NASDAQ:NVDA).
