4 Low-Cost ETF Choices For 2019
We don’t know what 2019 will hold for the markets. In fact, few experts do. However, there’s a lot of research to suggest that keeping your investing approach relatively simple, low-cost and tax-efficient can be prudent. Here are four lower cost Exchange-Trade Funds (ETFs). These may help you add mainstream asset classes to your portfolio without too much effort.
Vanguard FTSE Developed Markets ETF
Despite recent falls, U.S. stock valuations remain high by historical standards. Other regions of the world have lower valuations, which may improve your long-term returns on a multi-year view. The Vanguard FTSE Developed Markets ETF offers a simple way to get exposure to a range of countries such as Japan, the U.K. and Canada. We know that many U.S. investors tend to mostly own U.S. companies. However, that can be a mistake. It can add risk without necessarily boosting long-term returns. Though U.S. companies do indeed have global sales, international companies currently appear more attractively valued today on many metrics, and some sectors of the global economy are better represented overseas than in the U.S.
The cost of this ETF is 0.07% a year, creating a relatively easy way to own a portfolio of shares across countries as diverse as Korea, Australia and Denmark. This fund owns stocks, so it is risky in the short-term, but if you are just holding U.S. stocks today this may diversify your portfolio. If something negative were to happen specific to the U.S. economy, currency or political system, then a degree of international exposure, may help smooth your returns. The U.S. has been among the best performing stock markets over the past decade, but history suggests that these trends don’t last forever. The same trends have reversed in the past.
The Vanguard Short-Term Treasury Bond ETF
This is your basic and relatively low-risk option. The yield curve is currently flat, which is not a great sign for the U.S. economy. It also means that you aren’t paid much extra for holding longer term bonds. For example, at the time of writing a 2-year bond pays 2.7% and a 10-year bond pays 2.9%. That’s a narrow difference by historical standards. It means if interest rates didn’t move, you’d get just an extra 0.2% a year for holding 10-year bonds. That’s not much given that longer term bonds can carry more risk of big price swings, especially if further Fed rate hikes are on the cards.
Often, you receive a lot extra in interest payments for holding longer-term bonds. That’s not true today. As a result, holding shorter-term bonds may be prudent. You are less exposed to the effects of rates going up and down, and assuming the U.S. government continues to pay its debts, and inflation doesn’t spike, then you’ll see a nominal return of close to 3% a year without taking much risk. It’s nothing to write home about, but can be a useful place to earn a return on cash without much risk relative to other assets. Also, just to avoid any confusion, remember that bond ETFs can be traded freely, so just because you’re holding a 10-year bond, doesn’t mean you have to hold it for 10 years, you can generally sell it whenever you need to as with other stocks and bonds.
The major downside with short-term bonds is that over the longer term, better returns are generally offered by shares over time. However, short-term bonds offer the prospect of greater short-term stability, meaning you are less likely to make or lose a lot of money on price swings. It’s also worth noting that if the U.S. does dive into a recession soon, longer-term bonds might outperform short-term ones are interest rates drop.
This fund costs 0.07% a year of the assets you invest. This puts it among the lower cost funds out there. If you’re looking to take some risk off the table, this ETF may be one way to do it, but remember that it may miss out on longer term growth.
iShares Core S&P Total U.S. Stock Market ETF
If you’re looking for the absolute cheapest funds, then the iShares Core S&P Total U.S. Stock Market ETF comes in with an expense ratio of 0.03%. That’s among the lowest anywhere. It gives you a straightforward way to own holdings in around 3,000 U.S. firms. On an investment of $100,000 the cost from the expense ratio is just $30 per year. Plus, because it’s so diverse even large holdings like Microsoft typically don’t represent much more than 3% of the overall fund.
Of course, the U.S. market appears expensive right now, which is why looking overseas or making sure you have some bonds in your portfolio may make sense. Those are both potentially prudent moves, but may be particularly appropriate in the current investment climate. Nonetheless, if you are using a fund to track the U.S. market, do take a look at how much you are paying via the expense ratio. It’s possible this fund or others like it can cut your investment costs. For every $100,000 you have invested, a 0.5% reduction in expense ratios saves you around $500 a year, all else equal.
There are many funds out there that do basic index tracking at a cost of 0.5% or more, so it’s worth checking what you’re paying and making adjustments. Also, simply tracking an investment index is fairly simple to do now with automated technology, so different funds should see similar results. The main difference is how much they charge you. Studies have found that paying less for passive products that track an index, can lead to better returns.
Vanguard FTSE Emerging Markets ETF
Emerging markets are not for the faint-hearted, and do cost a little more to own than investments in developed markets. In this case the expense ratio comes in at 0.14% relative to 0.03% for some of the cheapest U.S. ETFs. However, emerging markets can offer a cheaper valuation than the U.S. and a way to still gain meaningful tech exposure because a lot of significant technology firms are based in China, and China represents a large proportion of the emerging market index.
Also, countries such as China, India and Brazil can often see higher rates of growth than developed markets, often supported by working-age population growth and urbanization. The International Monetary Fund’s estimates have emerging markets growing at almost double the rates of developed economies. Sharp ups and downs are quite typical for emerging market funds, such as this one. Yet, in a portfolio context, emerging markets can add some diversification benefit to a portfolio. For example, China endured the last recession better than many nations and even though Chinese growth could be slowing on most recent data, even slow growth for China has historically been the envy of many other countries as China brings people into cities on a massive scale.
So the above can be useful building blocks for your 2019 portfolio. Of course, this is only one part of the puzzle, many other factors including your stock/bond split matters too. Consider both the asset class and the cost when making adjustments. Yet, if, like many U.S. investors you are heavily loaded up on U.S. stocks, 2019 may be a good year to look overseas and inject some bond exposure into your portfolio too. Plus, even with your U.S. exposure double-check that you aren’t overpaying as ETF expense ratios keep on falling and a money saving option could be out there for you.