7 ETFs To Buy For Serious Diversification


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These ETFs have everything needed for a well-balanced portfolio

If you’re looking for ETFs to buy, don’t bother. I’m kidding.

A recent Motley Fool article appeared on Fox Business’s website. It asked the question, “Has the ETF Market Peaked?”

Author Dan Caplinger made the argument that at $5 trillion — the dollar amount of ETF investments held around the world — ETFs are starting to show a little wear and tear.

Delving further into the subject, the article brought up the fact that the largest ETFs by assets get most of the new money, leaving the thousands of others to fend for the scraps investors leave on the floor.

An interesting stat: Of the 268 ETFs launched in 2018, more than 80% of those funds failed to hit $50 million in net assets, and only one was able to hit $1 billion, the amount ETF providers shoot for to generate meaningful profits.

Worse still, 75% of ETFs launched between 2007 and 2016, that failed to hit $50 million in assets in the first year of operations, have remained below $50 million since.

So, what does it all mean?

Well, if you’re thinking about starting an ETF company, you might want to reconsider.

However, for the rest of us, here is a diversified list of seven ETFs to buy that should allow you to sleep at night.

Total Market: iShares Core S&P Total U.S. Stock Market ETF (ITOT)  

The iShares Core S&P Total U.S. Stock Market ETF (NYSEARCA:ITOT) is one of the ETF provider’s core holdings. It and six other ETFs give you a globally diversified portfolio of equities and fixed income.  

ITOT itself captures the entire U.S. equity markets with a total of 3,565 stocks, large and small. Charging just 0.03%, you’re getting these stocks for pennies on the dollar. You can opt for an S&P 500 ETF or something else that is large-cap oriented or you can bet on the entire market and call it a day.

However, just because it covers the entire U.S. stock market, it doesn’t mean you’re getting a lot of smaller, riskier stocks in your portfolio at the expense of larger, more established stocks. Cap-weighted, the biggest stocks by market-cap like Microsoft (NASDAQ:MSFT) get greater weightings.

So, even though ITOT does invest in small- and mid-cap stocks, they only account for 23% of the fund’s $18.5 billion in net assets.

It follows the KISS (keep it simple stupid) formula — and that’s a good thing.

Asset Allocation: First Trust Multi-Diversified Income Index Fund (MDIV)

Just as it’s possible to own a diversified portfolio of equities, the Multi-Asset Diversified Income Index Fund (NASDAQ:MDIV) provides investors with a diversified portfolio of asset classes.

At the cost of 0.71% annually, MDIV gives you a portfolio that’s 20% equities, 20% real estate investment trusts, 20% preferred securities, 20% master limited partnerships, and 20% in high-yield corporate debt.

Rebalanced quarterly, the ETF’s meant to provide five asset classes that aren’t correlated to each other while also providing an above-average yield. Currently, it yields 6.38%. If you’re an income investor, MDIV ought to be very attractive.

Since its inception in August 2012, it’s averaged an annual total return of 4.75%. That might not sound like much. However, MDIV is designed to provide downside protection rather than hyper-growth. I definitely wouldn’t buy it if you’re not an income investor.

Broad Commodity: Invesco DB Commodity Index Tracking Fund (DBC)

The Invesco DB Commodity Index Tracking Fund (NYSEARCA:DBC) tracks the DBIQ Optimum Yield Diversified Commodity Index Excess Return, a rules-based index that holds futures contracts on 14 of the most heavily traded physical commodities in the world.   

Reconstituted and rebalanced once a year in November, it’s got futures contracts for gold, oil, soybeans, natural gas, corn, sugar, wheat; the list goes on.

Because commodity prices tend to go in cycles, it’s not something you want to invest in if you think stocks are going to move higher. You want to own DBC when commodity prices are rising as they are in 2019. Up 10% year to date through March 27, it’s another ETF for investors looking to invest in an ETF that’s not correlated to the movements of the indexes.

At 0.89%, it’s also not cheap.

Small Cap: ProShares Russell 2000 Dividend Growers ETF (SMDV)

It seems odd to combine small-cap stocks with dividend-paying stocks, but that’s what the ProShares Russell 2000 Dividend Growers ETF (BATS:SMDV) investment strategy is all about.

Tracking the performance of the Russell 2000 Dividend Growth Index, the index invests in Russell 2000 constituents that have increased their earnings for ten consecutive years or more.

The index itself must hold at least 40 stocks with no sector accounting for more than 30% of the portfolio. Equally weighted, the index is reconstituted once a year in June, with rebalancing four times a year in March, June, September, and December.

Charging a reasonable 0.40% annually, it has a current dividend yield of 2.3%. Also, it has minimal turnover. In the past year, it averaged 20%, which means the average stock is held for five years.

In terms of performance, it’s delivered an average total return of 13% over the past three years, well ahead of its peers. If you want some smaller stocks in your portfolio, SMDV is a winner.

Sector: ARK Innovation ETF (ARKK)

Less than four years old, the ARK Innovation ETF (NYSEARCA:ARKK) is one of those ETFs that didn’t have a problem getting to $1 billion in net assets. It’s now at $1.6 billion, making it a popular fund for investors looking to make a bet on disruptive technologies.

Actively managed by portfolio manager Catherine Wood, it tends to own between 35 and 55 stocks. Currently, Tesla (NASDAQ:TSLA) is ARKK’s top holding with a weighting of 8.71%. Not only a fan of Elon Musk, Wood has both Twitter (NYSE:TWTR) and Square (NYSE:SQ) in the top 10 holdings suggesting she also has a thing for Jack Dorsey who runs both companies.

The summary prospectus explains Wood’s investment philosophy:

“The Adviser defines ‘‘disruptive innovation’’ as the introduction of a technologically enabled new product or service that potentially changes the way the world works. The Adviser believes that companies relevant to this theme are those that rely on or benefit from the development of new products or services, technological improvements and advancements in scientific research…”

Because the ETF is actively managed, the turnover is higher. In the last year, it reached 89%, which means it holds the average stock for a little over a year.

Wood is an excellent portfolio manager. Paying 0.75% annually for someone of her caliber is a relative bargain. If I could only own one sector ETF, this would be the one.

Global Developed Markets: Vanguard FTSE Developed Markets ETF (VEA)

I couldn’t go an entire article about ETFs to buy and not come up with at least one Vanguard fund.

The Vanguard FTSE Developed Markets ETF (NYSEARCA:VEA) tracks the performance of the FTSE Developed All Cap ex US Index, a collection of large-, mid-, and small-cap companies outside the U.S. in developed countries like Canada, UK and Japan.

If you’re looking for a focused portfolio, this isn’t it. The ETF has 3,974 stocks invested into its $109.8 billion in total assets. Its top ten holdings account for just 10.4% of the overall portfolio.

That’s perfectly fine when you consider you’re investing in countless countries outside the U.S. and only paying seven cents for every $100 invested.

If you’re looking to cover the world, VEA and ITOT will get the job done at a meager cost.  

Global Emerging Markets: SPDR Portfolio Emerging Markets ETF (SPEM)

Like ITOT, the SPDR Portfolio Emerging Markets ETF (NYSEARCA:SPEM) is intended to act as a core holding for any ETF portfolio. It is a foundational piece to build the rest of your house on.

The ETF tracks the performance of the S&P Emerging BMI Index, a cap-weighted index that invests in emerging market stocks with a minimum market cap of $100 million and sufficient liquidity. It then weights each stock proportionally based on its float-adjusted market cap.

Incredibly cheap at 0.11%, the fund is reconstituted once a year in September and rebalanced four times annually in March, June, September, and December.

In terms of sector investments, financials, consumer discretionary, and communication services are the three top weightings at 26.0%, 13.7%, and 11.5% respectively. While it invests in a wide array of countries, China is by far the most significant weighting at 33.2%, almost three times Taiwan, the second-highest at 13.8%.

Although emerging markets have had a checkered past in terms of performance, a trade deal with China would certainly help remove some of the headwinds the ETF faces.

If you want to go the global route, I’d personally do a 75/25 split between developed countries and emerging markets.

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


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