Exchange-traded funds have made it easier than ever for investors to build a diversified portfolio. But even though there are well over a thousand ETFs to choose from, you don’t need to own a huge assortment of ETFs to establish a solid set of core positions for your investing strategy.
In fact, looking at the top ETFs by assets under management according to the ETF Database, you could make a good argument that just picking from the biggest ETFs in the market would leave you with a reasonable starting point for a diverse set of investments. Let’s look at four of the top five ETFs to see whether they belong among your holdings.
With more than $135 billion in assets under management, the original Spider was the first ETF to become a household name among investors. Tracking the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), the SPDR ETF has rock-bottom expenses of just 0.09% annually, and its heavy trading volume and relatively high share price make the frictional costs of buying and selling shares as small as possible.
Nearly all U.S. investors like to have core exposure to large-cap U.S. stocks, and the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is one of the most popular benchmarks that both active and index investors use to evaluate their overall performance. An equivalent iShares MSCI EAFE Index Fund (ETF) (NYSEARCA:EFA) ETF that also tracks the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) makes the top five list, but you don’t need more than one S&P-tracking ETF in your portfolio.
Emerging markets have fallen out of favor recently, with some investors worrying that the Federal Reserve’s coming pullback on the extent of its quantitative easing program will have a negative impact on growth in emerging economies. The argument is that cheap financing has made it easier for U.S. investors to get money to invest in emerging markets, and so when rates start to rise, emerging markets will be the first to feel the impact.
Nevertheless, the Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO) has bounced back more recently as value investors have argued that shares have fallen far enough to make emerging markets a bargain. With annual expenses of just 0.18% and assets approaching $50 billion, the Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO) charges much less than many international funds, and exposure to companies in countries like China, Brazil, and South Africa could help your portfolio grow even when the U.S. isn’t performing well.
Emerging markets aren’t the only place to invest internationally. Developed markets in Japan and across Europe have also seen their ups and downs lately. But Japan’s efforts to devalue its currency to spur export growth has led to new interest in its stock market, and despite a recession in Europe, investors are starting to gain confidence in turnaround efforts there.