The Best ETF Funds In The World Right Now

Posted on September 23, 2013 at 3:13 PM PST by

Investing using exchange-traded funds (ETFs) offers retirement savers an amazing opportunity: The best ETF funds track market benchmarks at minimal cost.

Why does low cost matter? Well, for one, mutual fund fees are the major reason that most active investment funds fall short of their own benchmarks. A few outperform over the short run, but that rarely lasts.

In time, even “hot” active mutual funds end up at the bottom of the pile. The star manager moves on, the markets don’t cooperate, global events intervene.

best ETF funds

Exceptions exist, but you and I can’t invest in those vehicles. Minimum investments are in the millions and, increasingly, esoteric funds are going private and sending money back to outside investors. Government regulations are too much trouble.

Where does that leave us? Well, if you can handle the idea of getting the benchmark return (and regularly beating “winning” active managers), then your clear choice is an ETF. But which are the best ETF funds?

Here’s a tip: Broadly speaking, it doesn’t matter. Your job as an investor is not to “pick a winner” in the ETF world. Since they are designed to track their benchmarks, you will find that over time what you really want is an ETF that does so at the lowest cost and with minimal surprises.

So, here’s how to spot a really well-run ETF:

1. Buy an ETF that’s highly liquid. The market is flooded with funds that use the ETF structure but don’t really do what ETFs traditionally do. Instead of tracking a broadly followed index they attempt to replicate illiquid assets, such as the price of oil or a short position against the market. The problem is that not very many people buy and sell them. Fewer participants means increased chances of paying too much for a fund.

2. Don’t fall for high-fee ETFs. The best ETF funds are the ones that are really upfront about their total costs. These fees should be close to the cost one would expect to pay for a comparable index fund. The lowest-cost ETFs on the market now are very close to that, as low as 0.04%. Most of the well-known ETFs charge about 0.10%, more or less. Yet there are ETFs on the market that attempt to charge 2% or more. These are generally very narrow funds tracking non-traditional assets, such as commodities. Keep it cheap and simple.

3.  Allocate and rebalance. Research shows that, over the past 15 years, investors who owned a portfolio of ETFs that included a diversity of asset classes and who rebalanced with discipline enjoyed a 1.5% premium over the broad stock market return.

Keep these three points in mind and your retirement investment portfolio will exceed your expectations, good markets or bad.