A variety of ETF choices
Based on the 16% returns for the benchmark S&P 500 index of large U.S. stocks in 2020, chances are that last year was good to your investments. However, what worked previously on Wall Street may not work again in 2021. The political climate in the U.S. is much different after President-elect Joe Biden's win in November, and the pandemic is both raging strong today but hopefully set to end after the long-term rollout of vaccines. Given these circumstances, it's important to take an objective look at your goals instead of being complacent and sticking with the same holdings. If you're thinking of making a change or simply looking to reinforce an existing investment strategy, here are the 10 best exchange-traded funds, or ETFs, for 2021 that collectively offer a wide variety of opportunities.
SPDR S&P 500 ETF (ticker: SPY)
It's difficult to begin any list of the best ETFs to buy without including the biggest and most popular fund on the planet. SPY is the largest ETF by many measures, boasting around $330 billion in total assets at present and trading nearly 80 million shares each day. The reason it's so popular is that it is benchmarked to the popular Standard & Poor's 500 index of the 500 largest U.S. stocks. If you want to play the stock market but you're not sure just how to do so, SPY makes it very easy for investors by spreading your cash across these top companies.
Invesco QQQ ETF (QQQ)
Of course, it's worth pointing out that while the S&P 500 added an impressive 16% last year, the Nasdaq-100 index of the top 100 U.S. companies listed on the Nasdaq stock exchange rallied a tremendous 45% in the same period. So why not skip SPY and go with QQQ, which is linked to this high-flying alternative? The fund delivered roughly three times the returns of its larger cousin in part because the total number of stocks in the Nasdaq-100 is much smaller than the S&P 500, allowing it to focus more on fewer companies, but also because those individual names did very well -- including e-commerce king Amazon.com (AMZN) and tech giant Microsoft Corp. (MSFT), to name two.
Vanguard Information Technology ETF (VGT)
If technology investments interest you most in 2021, then one of the best ETFs to buy is this Vanguard fund that is not benchmarked to a broad index of stocks but rather to a list of companies that are only in the tech sector. Though the list of holdings is big at more than 340 total positions, you won't find a single pharma company, megabank or retailer as you would in the prior index funds. There's more risk here as a result, since your fortunes rise and fall with the fortunes of Big Tech. But as VGT delivered roughly 45% in returns last year, it is clear there is big potential for profits here if things go well.
Vanguard Growth ETF (VUG)
If you don't want to go "all in" on a specific sector but still want to focus on companies with higher growth potential in 2021, VUG is one of the best ETFs to buy. That's because it takes a slightly more sophisticated approach than the broad-based SPY or QQQ index funds by layering on screening methodologies and zeroing in on companies that appear to be growing their profits or revenue faster than their peers. That means you'll get exposure to tech stocks such as Apple (AAPL) along with retailers such as Home Depot (HD) and even railroad stock Union Pacific Corp. (UNP), based on the current numbers. With a wide array of more than 250 stocks, VUG offers a diversified way to tap into stock market growth in a single ETF.
Schwab U.S. Small-Cap ETF (SCHA)
Another interesting approach to tap into growth potential without relying on a small list of stocks in a specific sector is to simply go small. That's what SCHA offers, with a massive list of 1,800 stocks -- many of which you won't recognize because it excludes the big corporations that dominate other index funds. Instead, top holdings include companies such as LED light manufacturer Cree (CREE) and cancer-fighting startup NovoCure (NVCR). The ETF comes with an ultra-low annual expense ratio of 0.04%, or $4 for every $10,000 invested.
iShares MSCI USA Min Vol Factor ETF (USMV)
If you're less optimistic about the stock market in 2021 and instead want to take a more defensive approach, consider USMV. The name is intimidatingly complex at first glance, but it's easy to unpack: This ETF is benchmarked to a list of stocks compiled by MSCI, an index provider similar to S&P, and it focuses on "minimum volatility" stocks that go up and down less severely than their peers. This strategy is designed to give you an edge over the typical index fund. With holdings like Big Pharma giant Merck & Co. (MRK) and consumer staples king Pepsico (PEP), it's easy to understand why the stocks in this ETF are likely to have more stable revenue trends than other investments, even if they don't present breakneck growth forecasts.
iShares Core High Dividend ETF (HDV)
A twist on low-risk investing that offers a little more risk but also the potential for bigger rewards is to focus on high-yield dividend stocks. These companies offer proven stability through regular dividend payments to shareholders, as you have to have a substantial and consistent history of profits to share those profits with your investors. However, iShares has created this fund by excluding companies that offer below-average dividend payments -- ensuring you get a big payday. Specifically, HDV yields a 4% annual payout on your investment right now. That compares with a less than 2% yield from USMV and a mere 1.5% from an S&P 500 index fund like SPY.
Vanguard FTSE All-World ex-US ETF (VEU)
The prior funds all focus on investments within the United States, but there's a great big world of publicly traded companies. If you're either a bit skittish about domestic stocks or simply want to diversify an existing portfolio by adding international exposure, then VEU is perfect for you. This is an "all world" fund that includes every single geography, but it is also "ex-U.S.," so it excludes American-based corporations. That doesn't mean you get a bunch of tiny and unknown businesses, however, as VEU's top positions right now include Asian technology powerhouse Alibaba Group Holdings (BABA) and Swiss pharmaceutical company Novartis (NVS).
Vanguard FTSE Emerging Markets ETF (VWO)
For investors who are a bit more adventurous, this other international fund from Vanguard cuts out the larger companies in Europe, Australia and Japan, focusing on emerging markets such as China, India, Brazil, Russia and Mexico. These markets come with a bit more risk, particularly when it comes to virus-related economic impacts. However, they also have brighter long-term growth potential thanks to consumer and technology trends. Top holdings include Taiwan Semiconductor Manufacturing Co. (TSM) and Chinese e-commerce company JD.com (JD). If you really want to look abroad for investing opportunities, this broad Vanguard fund offers access to more than 5,000 emerging-market stocks in just one holding.
SPDR Gold Shares (GLD)
Given the political and public health uncertainty we face as 2021 gets underway, the stock market could be less attractive to some investors than traditional safe-haven investments like gold. That's what GLD offers with an exchange-traded investment that consists entirely of gold bullion whose performance is benchmarked to the precious metal. GLD is up about 25% in the last 12 months to beat the S&P 500 index of large U.S. stocks, so there's clearly profit potential in diversifying outside the stock market. However, the commodity can be volatile and leave investors open to extra risk as it is not as directly linked to tangible metrics like profits and revenues for public companies.
Ten of the best ETFs to buy for 2021:
-- SPDR S&P 500 ETF Trust (SPY)
-- Invesco QQQ ETF (QQQ)
-- Vanguard Information Technology ETF (VGT)
-- Vanguard Growth ETF (VUG)
-- Schwab U.S. Small-Cap ETF (SCHA)
-- iShares MSCI USA Min Vol Factor ETF (USMV)
-- iShares Core High Dividend ETF (HDV)
-- Vanguard FTSE All-World ex-US ETF (VEU)
-- Vanguard FTSE Emerging Markets ETF (VWO)
-- SPDR Gold Shares (GLD)