ETFs
3 Best ETFs for a Diversified Stock Portfolio
These three ETFs should check most boxes for non-professional investors.
Navigating the stock market can be overwhelming as it requires extensive research, continuous monitoring of market trends and inherent risks. For those looking for market exposure without the complexities of selecting individual stocks, exchange-traded funds (ETFs) offer a simplified solution.
A well-chosen set of ETFs can provide comprehensive coverage of key market sectors, including large-cap growth, technological innovation and small-cap potential. Here’s a look at three popular ETFs that offer broad coverage and exceptional long-term performance.
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1. SPDR S&P 500 ETF Trust
THE SPDR S&P 500 ETF Trust (TO SPY 0.13%) reflects the S&P 500 Index, bringing together 500 of the largest American companies. Since its launch in 1993, SPY has achieved a cumulative return of over 2,000%, including dividends.
With a spending rate by just 0.09%, SPY stands out for its profitability, significantly undercutting the category average of 88.6%. Although it is not the lowest level among its peers…Vanguard S&P 500 ETF affirms this distinction: the affordability of the SPY is remarkable.
SPY’s trading volume is immense, averaging around 70 million shares per day. This liquidity has made it a favorite among day traders and those seeking income through derivatives. The ETF’s trading activity is so robust that it has fostered a dedicated community of SPY options traders.
2. Invesco QQQ Trust
THE Invesco QQQ Trust (QQQ 0.24%) follows the Nasdaq-100 Index, which includes the 100 largest non-financial companies listed on the Nasdaq stock exchange. QQQ’s expense ratio stands at 0.20%, higher than some passively managed funds but still well below the category average of 0.98%.
QQQ is also known for its liquidity, with nearly 45 million shares changing hands every day. This makes it a preferred choice for active traders and those with substantial investments.
Over the past decade, QQQ has generated an impressive average annual return of 18.8%, surpassing the SPY’s 10.8% average. However, QQQ’s tilt toward technology stocks makes it riskier and more volatile than SPY.
3. iShares Russell 2000 ETF
THE iShares Russell 2000 ETF (IWM -0.75%) targets the Russell 2000 Index, which is comprised of small-cap U.S. companies. Over the past ten years, IWM has generated an average annual return of 7.8%, including dividends.
Although its performance has been more modest than that of SPY and QQQ, small-cap stocks have still dominated the market. If this trend were to resume after interest rates fell, IWM would be poised to take off.
IWM’s expense ratio is 0.19%, which, while not the lowest for small-cap ETFs, is significantly lower than the category average of 1.00%. The ETF enjoys high liquidity, with around 34 million shares trading daily, but it still has a fairly significant risk profile due to its focus on smaller companies.
Final Thoughts
These three ETFs – SPY, QQQ and IWM – offer investors a diversified approach to the stock market, covering the spectrum from large-cap stability to technological innovation to small-cap growth. They are aimed at investors who are looking for a balanced investment portfolio that taps into different market segments.
However, as with any investment, it’s crucial to align your ETF selections with your personal investment goals and risk tolerance. To reduce your risk profile, for example, you could replace QQQ or IWM with a low-risk bond fund.
George Budwell holds positions in the Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends the Vanguard S&P 500 ETF. The Mad Motley has a disclosure policy.