Editor’s Note: This article contains updated information from a previously published story.
Looking for a more tax-efficient and flexible alternative to mutual funds for an investment portfolio? Consider buying an exchange-traded fund, or ETF. These nifty investment vehicles allow investors to easily access diversified portfolios of equity, fixed income or alternative assets.
“The best ETFs have a proven track record of delivering consistent and reliable performance over time, meaning they’ve historically met their goals and generated returns in line with what they aim to achieve,” says Eliza Arnold, co-founder and CEO at 401(k) provider Arnie. “Additionally, the best ETFs tend to have lower fees, which means you get to keep more of your investment returns.”
To help investors find the best ETFs on the market, we assessed the U.S. ETF universe with a strict list of criteria that screened for expense ratios, assets under management, trading volume, level of diversification, track record and strategy. This helped us identify long-lived ETFs that possess low fees and strong liquidity.
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Best ETFs
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Vanguard Total Stock Market ETF (VTI)
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Vanguard FTSE Developed Markets ETF (VEA)
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iShares Core MSCI EAFE ETF (IEFA)
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Compare the best ETFs
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Why other funds didn’t make the cut
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Methodology
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Final verdict
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Frequently asked questions (FAQs)
Best ETFs
SPDR S&P 500 ETF Trust (SPY)
Net expense ratio
0.095%
AUM
$432.3 billion
What you should know
SPY debuted in January 1993, making it the very first ETF listed on U.S. exchanges. This ETF tracks the S&P 500 index, a well-known benchmark for overall U.S. equity market performance. SPY has continually dominated ETF headlines regarding AUM and volume thanks to its first-mover advantage. The ETF trades over 11 million shares daily, with a 30-day median bid-ask spread of zero, a testament to its strong liquidity. Augmenting this is a well-developed options chain with various strike prices and expiry dates available.
Pros and cons
Pros
- Very long track record of performance.
- Very high AUM and trading volume.
- Well-developed options chain available.
Cons
- Higher expense ratio of 0.095% compared to competitors at 0.03%.
- Lacks international stock exposure.
- Concentrated in the technology sector at more than 28%.
More details
Fund 10-year annualized rate as of June 30: 12.76%
Vanguard S&P 500 ETF (VOO)
Net expense ratio
0.03%
AUM
$340.5 billion
What you should know
Vanguard launched its own low-cost S&P 500 ETF competitor to SPY and IVV in September 2010, in the form of VOO. The ETF is a new share class of the existing Vanguard 500 Index Fund Admiral Shares (VFIAX) mutual fund. With a 0.03% expense ratio, VOO rivals IVV regarding fees. But as a newcomer, VOO has a shorter track record than IVV, lower trading volume and AUM. However, the ETF is still more than established enough for buy-and-hold investors seeking an affordable way to track the S&P 500 passively.
Pros and cons
Pros
- Decently long track record of performance since September 2010.
- Decently high AUM and trading volume.
- Low expense ratio of 0.03%.
Cons
- Options chain is not as well developed.
- Lacks international stock exposure.
- Concentrated in the technology sector at around 28%.
More details
10-year annualized rate as of June 30: 12.83%
Vanguard Total Stock Market ETF (VTI)
Net expense ratio
0.03%
AUM
$322.7 billion
What you should know
A popular tax-loss harvesting partner for is VTI, which tracks the CRSP US Total Market Index. Whereas the S&P 500 is limited to 500 large- and mid-cap stocks, VTI offers much broader market-cap-weighted exposure across nearly 3,900 large-, mid- and small-cap U.S. stocks from all 11 market sectors. The ETF offers a blended equity style, holding growth and value stocks. For a 0.03% expense ratio, investors can use VTI to quickly index the investable U.S. stock market.
Pros and cons
Pros
- Low expense ratio of 0.03%.
- Long track record of performance since May 2001.
- High diversification across market-cap sizes, equity styles and sectors.
Cons
- Its benchmark has underperformed the S&P 500 over the last decade.
- Concentrated in the technology sector at more than 30%.
- Options chain is not as well developed.
More details
Fund 10-year annualized rate as of June 3o: 12.29%
Vanguard FTSE Developed Markets ETF (VEA)
Net expense ratio
0.05%
AUM
$117.9 billion
What you should know
Investors wishing to diversify their portfolio internationally can consider VEA, which tracks the FTSE Developed All Cap ex US Index. The ETF holds over 4,000 large-, mid- and small-cap stocks weighted by market cap from countries, including Japan, the UK, Canada, France, Switzerland, Germany, Australia and Korea, to name a few. For a 0.05% expense ratio, investors can access a diversified portfolio of international equities without converting currency or buying American depositary receipts, or ADRs.
Pros and cons
Pros
- Offers broad international exposure to thousands of stocks from several developing markets.
- Low 0.05% expense ratio.
- Can be used to diversify a U.S.-heavy equity portfolio.
Cons
- Offers very low exposure to emerging market stocks.
- Historically underperformed U.S. stocks over the last decade.
- Performance can be affected by fluctuations in exchange rates.
More details
Fund 10-year annualized rate as of June 30: 5.67%
Compare the best ETFs
| Fund (ticker) | Category | Net expense ratio | AUM |
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| SPDR S&P 500 ETF Trust (SPY) | U.S. Fund Large Blend | 0.095% | $432.3 billion |
| iShares Core S&P 500 ETF (IVV) | U.S. Fund Large Blend | 0.03% | $356.2 billion |
| Vanguard S&P 500 ETF (VOO) | U.S. Fund Large Blend | 0.03% | $340.5 billion |
| Vanguard Total Stock Market ETF (VTI) | U.S. Fund Large Blend | 0.03% | $322.7 billion |
| Vanguard FTSE Developed Markets ETF (VEA) | US Fund Foreign Large Blend | 0.05% | $117.9 billion |
| iShares Core MSCI EAFE ETF (IEFA) | US Fund Foreign Large Blend | 0.07% | $102 billion |
Why other funds didn’t make the cut
In this ranking, we screened the U.S. ETF universe for funds with traits that demonstrated economy of scale, popularity and consistency. This meant screening for a high level of AUM, daily trading volume, long track record and firm reputation. As a result, all ETFs on this list come from three large well-known managers: Vanguard, BlackRock and SPDR.
Smaller, less liquid, newer ETFs from less well-known managers were not included. That doesn’t mean these ETFs are inferior or unworthy of consideration. Instead, we focused on ETF giants that provide broad-based products suitable for various investors.
Next, we imposed a maximum expense ratio of 0.1% to ensure that all eligible ETFs had low fees. Fees come directly from an ETF’s returns, so keeping these minimal is critical to ensure good long-term investment outcomes.
We also filtered out ETFs that had a narrow focus. ETFs that only targeted growth, small-cap, or energy sector stocks did not make the list. While these ETFs have their uses, our ranking of the best overall ETFs focuses on those with broad diversification across equity styles, market-cap sizes and sectors.
Finally, we excluded actively managed ETFs and factor-based, or “smart beta,” ETFs that combine active and passive investing elements. These ETFs use special rules-based methodologies to target specific factors that are proven to drive equity returns, such as value, low volatility or quality.
We excluded actively managed and factor-based ETFs after reviewing the results of the latest SPIVA Scorecard from the S&P Dow Jones Indices, which measures the performance of actively managed funds worldwide against their index benchmarks.
Methodology
Our curated rankings of the top ETFs were created by screening funds for several must-have metrics:
AUM: All ETFs on this list have accrued minimum assets under management of at least $10 billion.
Expense ratio: Each ETF on this list has a net expense ratio of 0.1% or lower.
Strategy: An ETF must be passively managed by tracking an external benchmark index to qualify for this list.
Track record: Each ETF on this list has at least a 10-year performance history.
Management: All ETFs on this list come from established U.S. asset management firms that have accrued at least $1 trillion in total ETF AUM.
Diversification: All ETFs on this list have a broad-market focus by targeting stocks from both growth and value styles, from more than one market-cap size and most stock market sectors.
Remember that what ultimately constitutes the best ETF for an individual investor’s needs will depend on their circumstances, such as risk tolerance, investment objectives and time horizon.
An experienced ETF analyst selected the funds above, but they may not be right for your portfolio. Before purchasing any of these funds, do plenty of research to ensure they align with your financial goals and risk tolerance.
Final verdict
ETFs are a great way of gaining diversified exposure to various asset classes, often at a low cost and with great liquidity and transparency.
Our pick for the best overall ETF is the SPDR S&P 500 ETF due to a combination of longevity, high AUM, excellent liquidity, low fees and an options chain. These traits make SPY a popular pick for retail or institutional investors looking for short-term trading tools or long-term buy-and-hold picks.
Frequently asked questions (FAQs)
ETFs can be a good investment for beginners. They can offer diversified exposure to a broad range of assets such as stocks, bonds, commodities or even a blend of assets. This can be a great way to combine an investment portfolio with minimal knowledge or research.
ETFs are also easy to purchase and sell as they are traded on major exchanges, just like individual stocks, which makes it easier for beginners to manage their portfolios.
Finally, beginners can start investing with a relatively small amount of money, as the cost of investing in ETFs is simply the price of a single share.
Despite the many advantages of ETFs, there are some drawbacks investors should consider. First, ETFs are subject to expense ratios. This can erode returns over time, whereas individual stocks do not charge such fees.
Some niche ETFs holding exotic assets may not be as liquid and have a greater bid-ask spread, making buying and selling them more challenging and potentially costly. Finally, ETFs may be too diversified for investors looking to make a high-conviction investment in a single stock.
As with any investment, the level of safety in ETFs ultimately depends on the specific assets tracked, with equities being riskier and high-quality fixed-income being less volatile. Generally, ETFs provide diversification, so they can be considered safer than investing in individual stocks.
This is because the value of most ETFs isn’t tied to the performance of a single company, as it is with individual stocks. However, in a market downturn or crash, ETFs can and have lost substantial value due to market risk. To understand the riskiness of an ETF, make sure to scrutinize its strategy, holdings and historical volatility closely.