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Exchange-traded funds, or ETFs, have exploded in popularity in recent years as they offer investors an instant way to gain broad diversification and unlike mutual funds can be bought or sold during the trading day. But with hundreds of ETFs available to choose from which ones are the best ones to buy for the year ahead?
Below is a list of three ETFs that I think that investors should consider.
For U.S. focused investors
Large-cap stocks have been on quite a good run as the group has outperformed the returns offered by small caps recently, but that won't always be the case. Over long periods of time small-cap stocks tend to do better than large-caps as their smaller starting size allows them to grow at much faster pace then large companies can, and for longer periods of time. That stronger growth rate tends to translate into higher returns.
One ETF that investors can use to play the eventual resurgence of U.S. small-caps is the Vanguard Small-Cap ETF (VB +0.97%). This ETF offers investors huge diversification as it currently counts more than 1,500 stocks amongst its holdings, and it charges a minuscule expense ratio of only 0.09%.
Over the last 5 years this fund has underperformed the large caps by roughly 12%, but over a 10-year period the Vanguard Small-Cap ETF has been the place to be.
This ETFs also offers up a juicy yield 2.30% right now, which is a higher payout than you can get from large-caps.
The combination of a higher yield mixed with small-caps strong history of outperformance could make this ETF a winning choice in 2016.
For contrarians
The strengthening of the U.S. dollar mixed with the collapse in commodity prices has cause many international stocks to take it on the chin. Thats doubly true for investors who put money to work in emerging markets as they tend to have a huge reliance on commodity prices to keep their economies humming.
A quick look at a five year chart comparing the S&P 500 to the iShares MSCI Emerging Markets ETF (EEM +0.98%) shows just had bad the carnage has been.
As you can see, the EEM has drastically underperformed the U.S. markets in recent years, but if you are a believer in the rise of the global middle class than now might be a great time to invest in this beaten down ETF.
The iShares MSCI Emerging Markets ETF holds a huge collection of more than 800 large and mid sized companies that make money in the emerging economies. Its assets are well diversified around around the globe as it offers up exposure to China, India, Brazil and more.
This funds recent underperformance has pushed its currently yield up to 2.48%, which is near its 5-year high and could be a signal of its value.
When the U.S. dollar eventually weakens and commodity prices recover this fund could be positioned nicely to outperform. In the mean time its generous dividend yield more than covers its small expense ratio of 0.68%.
For risk tolerant investors
While emerging markets have been sucking wind recently, the biotech sector has been on an absolute tear. One ETF in particular, the SPDR S&P Biotech ETF (XBI +2.85%), has put up an unbelievable performance five year performance that has left the S&P 500 in the dust.
So whats the secret to this ETFs success?
As its name implies the SPDR S&P Biotech ETF concentrate its in the biotech sector, as it currently holds a position in 105 different companies. Many of these companies are small-cap biotech stocks that on an individual basis are very high risk, but this funds great diversification helps to make investing the in the space more palatable.
One feature I really like about this ETF is that it employs an equal-weight strategy, meaning that it invests the same amount of capital into each one of its 105 different stocks, so if one of its holds has a monster run -- which can happen in the biotech space -- then the entire ETF has a good chance of moving higher.
This fund isn't for the faint of heart as its investing style makes it very volatile, but if you have a strong stomach and are looking for an ETF to turbo charge your returns in 2016, this ETF might be a good choice.
