Barbara Friedberg


Even though there are more than 1,500 equity exchange-traded funds, choosing the right ETF doesn’t need to be complex.

SOMETIMES TOO MUCH OF A good thing really is too much. Psychologists Sheena Iyengar and Mark Lepper published a highly-cited consumer behavior study that found shoppers bought more jam at an upscale market when presented with only six choices versus a display table with 24 varieties.

While marketers and fund managers ascribe to the more is better approach, this isn’t necessarily helpful for investors. The jam example and others studies show consumers frequently feel inundated with too many choices, causing avoidance or decision paralysis.

Investors may be overwhelmed with more than 1,500 equity exchange-traded funds. Despite countless choices, picking an equity ETF can be simplified. In fact, research shows market-matching ETF investing performs better than actively managed funds most of the time.

With choices ranging from SPDR S&P Software & Services ETF (ticker: XSW) to smart beta funds, such as the iShares Russell 1000 Growth ETF (IWF), there’s an equity ETF for every type of investor. An investor can even stick with the legacy Vanguard Total Stock Market ETF (VTI) and get U.S. equity exposure with one fund.

Here are a few ways an investor can choose an equity ETF.

Take Steps to Evaluate an ETF

Stephan Biggar, director of financial services research at Argus Research in New York, offers a sensible three-step plan for picking an ETF.

He says the first step is to consider whether the top 10 to 20 holdings in the fund fit in your investment criteria and aren’t failing stalwarts, such as General Electric Co. (GE) or J.C. Penney Co. (JCP).

Biggar says to then look at cost. He recommends keeping expense ratios below 0.25 to 0.3 percent, excluding international funds, which might charge more. Finally, he recommends liquid and actively traded funds with bid-ask spreads at no more than 2 cents.

Another factor to add to the ETF evaluation toolbox is the tracking error. It makes no sense to choose a low-fee ETF if it does a poor job of replicating the returns of its benchmark index. Investors choose passive index funds to capture the market returns.

“The fit of an ETF can be determined by its tracking difference and the smaller the better,” says Daniel Taylor, founder of Taylor Morgan Capital Management in Dallas.

But other financial professionals have their own take on picking equity ETFs.

Shawn Johnson, founder at Guidon Global in Boston, says that if investors stay away from leveraged, actively managed and smaller ETFs, the pool of viable equity ETFs shrinks substantially. These actively managed ETFs are fine for sophisticated investors with specialized investment strategies. But most investors will do well to keep it simple.

Consider ETFs With Broad Diversification

For the investor seeking simplicity, Daniel Ruedi, financial advisor at Ruedi Wealth in Plano, Texas suggests a diverse ETF. For a one-stop equity ETF, he recommends the Vanguard Total World Stock ETF (VT). It’s an all-stock portfolio, style-pure with no bonds or cash; it covers a representative sample of the U.S. and international equity market. Investors shouldn’t fear a lack of diversification with this fund, since it owns more than 8,000 stocks that represent both U.S. and international companies that operate in developed and developing countries. VT tracks the FTSE Global All Cap Index and charges a management-expense ratio of 0.1 percent.

When delving into specific stock ETF strategies, investors should take a look at stock ETFs as an extension of their own investment values, says Rob Isbitts, founder and chief investment strategist at Florida-based Sungarden Investment Research. For someone who values earnings quality and dividend growth, Isbitts recommends selecting ETFs that mirror those styles. There are many dividend aristocrats ETFs from which to choose, including the SPDR S&P Dividend ETF (SDY) and the ProShares S&P 500 Dividend Aristocrats ETF (NOBL).

But passive market matching investing strategies aren’t for everyone. Despite the proven studies that stock market index returns outperform those of actively traded funds most of the time, there are those investors who want to surpass market returns.

Peter J. Creedon CEO of New York-based Crystal Brook Advisors asks, “Why not look for the 20 percent of active managers that outperform the passively managed index funds?”

But he counsels investors to consider risk and seek out actively managed ETFs with comparable risk in their passively managed funds.

Explore Socially Responsible ETFs.

There are also socially responsible stock ETFs that include companies that are cognizant of environmental, social and corporate governance impact, says B. Scott Sadler, founder and president of Atlanta-based Boardwalk Capital Management, on investments that can also garner matching returns. Many of these socially conscious funds reap returns that are comparable or better than their index-fund counterparts.

Sadler recommends iShares MSCI KLD 400 Social ETF (DSI). The fund holds 402 stocks and is composed of U.S. companies with positive environmental, social and governance characteristics. The top companies in this fund include Microsoft Corp. (MSFT), Facebook (FB), and Alphabet (GOOG, GOOGL), to name a few.

The DSI expense ratio is around 0.25 percent and the returns are impressive. The one, five- and 10-year annualized returns for DSI are 16.57, 12.72 and 11.32 percent, respectively. In comparison, the SPDR S&P 500 ETF (SPY) returned 7.16, 11.19 and 13.14 percent during the prior one, five- and 10-year periods.

To choose the best equity ETFs, investors need to decide whether they want market-matching returns or an attempt to beat the market. For an ETF portfolio that allows an investor to set it and forget it, they should choose a few index tracking funds and avoid the hundreds of specialized equity ETFs. Experts say to cover the world of equity investments, a total stock market U.S. equity ETF combined with an all-world ex-U.S. fund will do the job.

Author: Barbara Friedberg

Source: Money. US News: How You Can Choose the Best Equity ETF

Look overseas for opportunities in stocks.

You might be tempted to skip investing in international stocks with the sector’s weak recent performance in contrast with U.S. markets. But the international markets are more reasonably valued than those of the U.S. Currently, Vanguard FTSE All-World ex-US Index Fund ETF (ticker: VEU) has a price-earnings ratio of 15.6 in contrast with the S&P 500’s P/E ratio of 24. Long story short, the higher P/E ratio of the S&P 500 represents more overvalued assets while a lower P/E ratio such as VEU suggests under or fairly valued assets. Unless you own a fail-proof crystal ball, it’s smart to diversify your investments internationally. Here are seven of the best international stock funds to buy in 2020.

Vanguard FTSE All-World ex-US Index Fund ETF Shares (VEU)

For exposure to the entire international equity market, it’s tough to beat this Vanguard staple. This foreign, large-cap blend fund tracks the performance of the FTSE All-World ex US Index. Efficient investors seeking one fund for their entire global allocation should look no further than VEU, with a 0.09% expense ratio. The fund owns more than 3,300 stocks, enough for excellent diversification. The fund is passively managed and enjoyed an outstanding one-year return of 21.63%. The companies within the fund are allocated with 23% to emerging markets, 42% to Europe, 28% to the Pacific regions, 6% to North America and less than 1% to the Middle East.

Fidelity China Region Fund (FHKCX)

With low interest rates across the globe, economic growth and global stock markets will likely be strong, experts say. The impact of the coronavirus, similar to that of the SARs virus, will tamp down markets for a short period and then rebound. With Chinese markets on sale, Fidelity China Region Fund is appealing. The investment’s goal is capital growth with 80% of assets invested in Hong Kong, Taiwan and China. The securities are selected using fundamental analysis of the firm’s financial condition, industry position, market and economic conditions. The fund’s 0.95% expense ratio is below the category average.

Vanguard FTSE Emerging Markets ETF (VWO)

The prominent VWO emerging markets fund owns thousands of large-, mid-, and small-cap foreign stocks located in emerging markets around the world. Typically, an emerging market economy lacks high levels of market efficiency and financial regulations and is on the path to becoming more advanced. For investors who believe that the smaller corners of the international markets are poised for growth, this Vanguard pick is a sound choice. The one-, three- and five-year annual returns of 20.8%, 10.6% and 5%, respectively, demonstrate a positive trend for VWO. The 3.24% dividend pays investors as they anticipate price appreciation. VWO tracks the performance of the FTSE Emerging Markets All Cap China A Inclusion Index. With a low 0.12% expense ratio, this diversified emerging markets fund gives investors a chance to participate in the faster growth of these nascent economies.

T. Rowe Price Global Stock (PRGSX)

This actively managed fund, launched in 1995, seeks long-term capital growth by investing in established companies worldwide, including the U.S. David Eiswert, the fund manager, invests in a variety of industries spanning the developed and emerging markets. PRGSX seeks out companies with a growing market share, strong free cash flow, solid profitability margins and experienced management. Ten years ago, $10,000 invested in PRGSX would have grown to more than $31,700 in contrast with $23,200 for the MSCI ACWI Index. The fund’s geographical diversification favors North America with 48.6%. The remainder of the fund is allocated in decreasing proportions to Europe, Pacific region ex-Japan, Japan and Latin America.

iShares MSCI Chile Capped ETF (ECH)

“For decades Chile had enjoyed some of the highest-percentile growth of all countries, but this pattern became less consistent in recent years,” says Steven Jon Kaplan, CEO of True Contrarian Investments. The fund has been volatile, due more to negative investor reaction to media coverage of civil unrest in Chile and not decreased corporate profitability. The Chilean civil unrest was influenced by an increase in the Santiago subway fare and there is no indication that corporate profits will decline, Kaplan says. ECH has an expense ratio of 0.59%, with 2.47% yield. The Chilean economy is concentrated in areas that will generally benefit from global growth and rising inflation, which should be major features of the financial markets in 2020 and 2021. Kaplan expects ECH to outperform most other country funds, including U.S. stock funds, during the next year or two.

Vanguard FTSE Europe ETF (VGK)

“In the current market environment where valuations are reaching attractive levels in developed Europe relative to the U.S., an allocation to Vanguard FTSE Europe ETF provides diversification to a U.S. portfolio along with relative upside potential,” says Mike Treidl, a director of institutional investments at Miracle Mile Advisors. This ETF tracks the performance of the FTSE Developed Europe All Cap Index and provides European market exposure at a competitive price with an expense ratio of 0.09%. With a 3.28% yield, VGK offers strong cash flow and diversified access to the European stock market. The top four sectors are financials, industrials, health care and consumer defensive. VGK’s returns have been comparable with those of VEU, with the overlap of the developed stock markets. This fund would be a good international fund in combination with VWO for broad global coverage.

Schwab Global Real Estate Fund (SWASX)

Craft the best international funds portfolio with this nod to global real estate. The actively managed global real estate mutual fund owns 147 companies concentrated in midsize firms. The top holdings include both U.S. and international real estate companies including Prologis (PLD), Sunac China Holdings, AvalonBay Communities (AVB), Simon Property Group (SPG) and Camden Property Trust (CPT). The top investment regions for the fund are the U.S., Japan, China, United Kingdom, Germany and Sweden. SWASX handily beat the FTSE EPRA/Nariet Global Index, the global real estate benchmark, in every recent period. The fund’s one-, three- and 10-year returns averaged 27.78%, 10.81% and 8.61%, respectively. The 2.68% yield adds attractive cash flow to the global real estate fund.

The best international stock funds to buy:

  • Vanguard FTSE All-World ex-US Index Fund ETF Shares (VEU)
  • Fidelity China Region Fund (FHKCX)
  • Vanguard FTSE Emerging Markets ETF (VWO)
  • T. Rowe Price Global Stock (PRGSX)
  • iShares MSCI Chile Capped ETF (ECH)
  • Vanguard FTSE Europe ETF (VGK)
  • Schwab Global Real Estate Fund (SWASX)

Author: Barbara Friedberg

Source: Money. US News: 7 Best International Stock Funds to Buy in 2020

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