Best ETFs For Investors 2017 (2024)

Where do you get the best index ETFs? We have a formula that answers that question.

In 13 categories of investment, from big U.S. stocks to international bonds, this annual survey ranks the best buys in exchange-traded funds. The determining factor: cost of ownership.

Most of the $2.2 trillion sitting in U.S.-based ETFs is indexed, meaning that your money is apportioned automatically to some predefined basket of stocks. Managerial talent is not a factor. All that matters is which product skims off the least in overhead.

There are such things as actively managed ETFs, but they are rare and aren’t covered in this survey. The Best ETFs For Investors 2017 list focuses on passive funds. It has 481 funds that qualify: $50 million or more in assets and net annual expenses no higher than 0.4%.

At the top of the chart for funds owning large-company stocks is the Schwab U.S. Broad Market Index ETF (SCHB). Its rock-bottom 0.03% expense ratio, combined with a cost offset from securities lending, yields an ownership cost of only $23 over ten years on a $10,000 investment.

The deal is almost as good at Vanguard. Its Total Stock Market fund (VTI) would cost you $48 over the decade.

There aren’t comparable bargains in bond funds, because bonds don’t yield much in the way of lending fees to offset the overhead. For broad coverage of high-grade bonds you’d get Schwab U.S. Aggregate Bond (SCHZ), Vanguard Total Bond Market (BND) or iShares Core U.S. Aggregate Bond (AGG). Ten-year costs on all three are close to $100.

Three costs go into the rankings:

–the expense ratio, which is the fee levied on the portfolio by the fund vendor.

–the big/ask spread, which is a trading cost that the investor surrenders to middlemen on entering and exiting a fund.

–the cost offset from fees the portfolio picks up by lending out shares (and sometimes bonds) to short-sellers. For portfolios specializing in shares of small and speculative companies, the lending revenue can more than offset the expense ratio, yielding a negative cost of ownership.

The lending fee bonanza is quite evident in iShares Micro-Cap (IWC) and Schwab Small-Cap (SCHA). Their net costs over a decade: -$115 and -$95.

New in this year’s survey: A liquidity score based on trading volume and bid/ask spreads (best = 10). You can get into and out of several thousand shares of a fund rated 10 without pushing the price away. A fund with a 1 for liquidity would be more problematic. Buy a fund with low liquidity only if you are going to stay put for a long time.

Beyond liquidity, there’s something else to think about when trading ETFs whose portfolios are not easily hedged, and that is timing. You don’t want to be placing trades in these funds when the majority of other investors are headed in the same direction. The hard-to-hedge group would include international funds that own shares in markets that are closed abroad when you’re buying or selling the ETF. It would also include iShares Micro-Cap, which specializes in illiquid stocks.

If you are buying a hard-to-hedge fund when everyone else is buying, says ETF consultant Gary Gastineau, the ask price could be well above the intrinsic value of the fund share. That’s because the market-makers can feed the demand only by buying the portfolio stocks and presenting these to the fund sponsor as a trade-in for new ETF shares. Conversely, if you sell a hard-to-hedge fund when the middlemen are getting a flood of sell orders, your hosing will exceed the visible bid/ask spread.

In our 10-year cost calculation, recurring costs (expenses minus lending revenue) overshadow trading costs. Not included in our trading cost: brokerage commissions, which (as a percentage of the amount invested) vary greatly from trade to trade and are sometimes zero. You might find a commission-free trading deal that suits you, but don’t let this come-on lure you into a fund that scores badly for 10-year costs.

Morningstar is the source of the asset, trading volume and expense ratio data that went into the scorecard. The bid/ask spreads used are averages captured from Bloomberg terminals over four days at different times of the day. Fund sponsors provided the lending revenue figures.

Morningstar.com provides rich detail on ETFs, much of it available to non-subscribers. Things to look for: largest holdings, yield, average maturity of bonds and the effect of income taxes on your returns. There’s also information about past returns, but if you are an index investor you shouldn’t pay those much mind.

Best ETFs: Large-cap

Best ETFs: Small- and Mid-Cap

Best ETFs: Sector Funds

Best ETFs: Diversified International

Best ETFs: Specialized International

Best ETFs: Currency and Commodity

Best ETFs: Short-term Bonds

Best ETFs: Medium-term Bonds

Best ETFs: Long-term Bonds

Best ETFs: Inflation-proof Bonds

Best ETFs: Municipal Bonds

Best ETFs: International Bonds

Best ETFs: Stock and Bond Mixes

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