Top (Stock and Bond) ETFs. And Some Best-Performing ETFs. (October 2017)

Milan Kovacevic October 17, 2017

Are you wondering what the top (US and international) equity and fixed income ETFs are? 

If so, you’re at the right place.  We’ll provide you with the league tables of top ETFs by category (domestic, developed ex-US, emerging markets equity, and fixed income), and also highlight where some successful investors have put their money. 

Our core belief is that there is no such thing as “the best ETF”.  We will tell you instead what the top ETFs by assets and by category are, what their performance characteristics (return, cost, Beta) look like, and how much money is invested in those assets. 

So let’s start.  First let’s take a look at the top 10 ETFs by assets invested in them.  If you’re a totally new investor, and you won’t know where to put your money, you may want to take a look at those—top ETFs have really good performance and relatively low costs compared to the average. 

Here is our takeaway about top 10 ETFs globally:

Top ETFs (by assets) are predominantly equity ETFs.  The most popular investor choices are S&P 500 ETFs, such as SPY and IVV.

In one of our previous posts, we explained how equity ETFs are superior in performance to fixed income, alternatives, currencies and commodities ETFs.  So it’s no surprise that top ETFs by assets are equity ETFs.

The most popular investment theme, based on the analysis of top 10 ETFs, is US large-cap equity.  But there are also some other themes such as US mid-cap (IJH), US fixed income (AGG), and international ex-US equity (VEA, EFA and VWO) represented in the top 10. 

Looking at the top 10 list, it doesn’t take too long to notice that US equity ETFs are the cheapest, measured by the expense ratio.  Also, they are among the top performing.

Here is the chart showing top 10 ETFs’ performance vs. expense ratio: 

The top 10 ETF list may give you an idea how to choose your investment themes if you’re new to investing.  The themes I’d considering including in my portfolio are US and international (developed and emerging market) equity, and fixed income (i.e., bonds).

Now, let’s take a look at the top ETFs by assets for each of those categories: US equity, international equity, and fixed income. 

Top US equity ETFs (by assets) are by-and-large focused on large-cap stocks.

Three out of top 10 US equity ETFs are tied to the S&P 500 index: SPY, IVV and VOO.  Other popular choices include Vanguard’s Total Stock Market VTI (which covers 99% of stocks trading on the US stock exchanges), and a NASDAQ ETF—PowerShares QQQ.

Among the top 10 ETFs, there is one mid-cap (IJH) and one small-cap (IWM) ETF.  Mid-cap and small-cap ETFs are notable because on average, they perform better than large-cap ETFs

There is only one equity ETF that does NOT focus on stocks in the top 10 list—Vanguard REIT VNQ.  VNQ tracks performance of publicly traded equity REITs (real-estate investment trusts).

Here is the top 10 list of US equity ETFs

Over the last 5 years, US equities have performed incredibly well—most of the top 10 ETFs have returned above 14%.

Note that there is no ETF in the top 10 US equity category with an expense ratio higher than 0.2%.

Now let’s take a look at international equity ETFs. 

Among the top 10 international (ex-US) equity ETFs (by assets), 6 represent developed and 3 represent emerging markets.

The most popular choice for developed markets ETFsis iShares MSCI EAFE (EFA).  EAFE is an acronym that stands for Europe, Australasia and Far East.

Other popular choices include Vanguard FTSE Developed Markets (VEA) and iShares Core MSCI EAFE (IEFA), which is similar to EFA, but has a substantially lower expense ratio.

The most popular choice for emerging markets ETFsis Vanguard FTSE Emerging Markets (VWO). The fund tracks performance of emerging market stocks, including China A shares.

Other popular choices include iShares MSCI Emerging Markets (EEM) and iShares Core MSCI Emerging Markets (IEMG).  IEMG is notably cheaper than EEM, though it is similar in terms of portfolio holdings to EEM.

Here is the top 10 chart of ex-US equity ETFs:

Performance wise, developed market ETFs have done better than emerging market ETFs.  On average developed market ETFs have returned above 9% over the last 5 years, while emerging market funds have returned over 4%.

As an investor, you should strive to have both developed and emerging market equity in your portfolio. 

Now, let’s move on and look at fixed income ETFs.

The most popular choices among fixed income ETFs focus on US investment grade bonds—a mix of corporate and government.

Such broad-based ETFs include iShares Core US Aggregate (AGG) and Vanguard’s Total Bond Fund (BND)

But if you’re looking for a higher return among fixed income ETFs, you may want to go with corporate bond funds.  Corporate bond ETFs, such as iShares iBoxx LQD, have a higher return than government bond funds (e.g., iShares TIP).

In general, the return on fixed income ETFs is inversely correlated with the investment grade of the underlying securities.  Some of the highest return bond ETFs (e.g., iShares iBoxx High Yield Corporate LQD and iShares US Preferred Stock PFF) have the lowest investment grades. 

Here is the top 10 list of fixed income ETFs by assets:

The returns on most fixed income ETFs fall in the 2-4% range (for the last 5 years), and the expense ratios are typically below 0.5%. 

Having some exposure to bonds in your portfolio may be a good thing—the question is how much?

So what’s the bottom line?

If you’re looking for ETFs to choose for your investment portfolio, top ETFs (ranked by assets) may provide some good options.  (By doing so, you’ll also miss some excellent choices, and essentially all new ETFs with shorter track records.) 

Money follows performance and avoids costs and risks.  Replicating the flow of money may not be a horrible thing to do.

Remember to diversify the themes in your portfolio: invest in US, developed, and emerging markets equity ETFs, and fixed income funds.

Questions or comments? Send us your questions and thoughts to: hi [at] finstead [dot] com.

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