How to Choose the Best ETFs for Long-Term Investing

Long-term investors generally look for ETFs they can hold for several years, or their full investment time horizon, which may be decades. Therefore, the best ETFs for the long term may include a diverse set of ETFs with low expenses, high assets under management and a long-term performance history. 

How to Choose the Best ETFs for Long-Term Investing

Evaluating the best ETFs for the long term will not be the same for every investor; however, there are some general guidelines that can be followed. For example, since most ETFs passively track a benchmark index, low expenses are an advantage for long-term performance. Other criteria include assets under management and performance history. 

Selection criteria for choosing the best ETFs include: 

  • Expense ratio: When evaluating ETFs that track the same index, the one with the lowest expense ratio will generally perform better than those with higher expense ratios. 
  • Assets under management: Large ETFs, or those with higher AUM, tend to have higher trading volumes, which can lead to superior pricing through lower bid/offer spreads. 
  • Performance history: While past performance is no guarantee of future results, a long performance history can provide a clue about how closely an ETF tracks its benchmark and how it performs compared with its category peers. 

Best Types of Long-Term Investment ETFs

The best types of ETFs for building a long-term portfolio depend on an investor’s chosen portfolio structure, which may include a diverse mix of stock and bond ETFs. Some investors choose to build a portfolio of several funds around a core holding, such as an S&P 500 index fund, while others may want a simple mix of a total stock, total bond and total international funds. 

For example, some investors may prefer a “core and satellite” structure, which may consist of one core holding, such as an S&P 500 index ETF or a “total market” ETF, along with several other diverse ETFs in different categories, such as developed markets, emerging markets, growth stock, value stock and a range of market capitalizations.  

Examples of ETF Types Used in Long-Term Portfolios 

  • S&P 500 ETFs: Track the S&P 500 index, which consists of the largest 500 U.S. company stocks, as measured by market capitalization. 
  • Developed Markets Ex-U.S. ETFs: Track a foreign stock index, such as the MSCI EAFE Index or FTSE Developed Index, consisting of large and midcap stocks from developed regions outside of the U.S., including Europe, Asia and the Far East.  
  • Emerging Markets ETFs: Track the FTSE Emerging Markets Index or MSCI Emerging Markets Index, which invest in large and midcap stocks from non-developed economies, such as China, India, Brazil and South Korea. 
  • Small Cap ETFs: Invest in the equity of companies with a market capitalization of roughly $300 million to $2 billion. 
  • Midcap ETFs: Invest in the equity of companies with a market capitalization of roughly $2 billion to $10 billion. 
  • Total Stock Market Index ETFs: Invest in the equity of U.S. companies that include a range of market capitalization, from small to mid to large cap stocks. 
  • Fixed Income: In this broad category, we only considered the “U.S. broad market segment,” which would include bond funds that track a “total bond market index,” such as the Bloomberg US Aggregate Bond Index, which tracks the performance of the entire U.S. bond market. 
  • Growth ETFs: Invest in stocks of companies with potential for above-average growth. 
  • Value ETFs: Invest in stocks of companies that are undervalued as determined by certain fundamental measures, such as P/E ratio. 
  • Dividend ETFs: Income-focused funds, typically investing in companies with either high or stable and growing dividends. 

Bottom Line 

Ultimately, choosing the best ETFs for the long term will consider an investor’s risk tolerance and time horizon. That said, long-term investors can generally afford to take more risks with their investments, meaning they can allocate their portfolios more heavily to stock ETFs than bond ETFs compared to investors with short-term investment horizons. 

To search for the best ETFs to suit your investment goals, time horizon and risk tolerance, you can use our ETF Finder or look through lists of ETFs by category or sector in our ETF.com Channels

 

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