With more and more ETFs available on the market every day, sorting through the options to select investments for your portfolio can feel a little overwhelming.
ETF.com recently polled advisors, asking them to name a fund they are recommending within their portfolios and why. Responses ranged from vanilla cap-weighted ETFs to commodity future ETFs, capturing the versatility of the wrapper and providing insight into important factors to consider when it comes to building an investment portfolio.
Chief Investment Officer
One ETF position we hold as a “core” holding across most of our accounts is the iShares Core Dividend Growth ETF (DGRO). We consider a growing dividend payment a sign of the financial health of a company and believe that dividend growth companies should outperform the broader S&P 500 over time.
Further, companies that can grow their dividend over time would likely not fall into the “value trap” category. This quality aspect of many companies in this index [is what makes them] superior to cyclical value stocks and, in our opinion, is one reason DGRO has outperformed the [iShares Russell 1000 Value ETF (IWD)] over time.
In all, we believe the combination of exceptionally low cost (8 basis points), above-market dividend yield and a quality portfolio tilt all combine to form a compelling, core, U.S. large-capitalization-focused ETF.
Co-CIO & Co-Founder
XML Financial Group
We really like the iShares Core S&P 500 ETF (IVV). Even though the S&P 500 has about 25% in tech and is a market-cap-weighted portfolio, it is still a good sampling of the broad market for diversification and covers the large cap value and growth stock universe.
The S&P 500 has become the gold standard benchmark for measuring investment performance versus other indexes. It is top tier in investment performance since its inception. Being a market-cap-weighted portfolio, a large proportion of the returns are driven by momentum stocks that are important in [the current] and future economic environment. Having the largest 500 stocks generally leads to companies with good consistent earnings and dividends.
It also provides international exposure through the U.S. companies doing business abroad and can give more stability versus buying international companies in other countries and currencies. Lastly, this is a great way to own 500 great companies in a very inexpensive way.
CEO & Co-Founder
GYL Financial Synergies
Often it’s the case that investors seek to navigate the volatility that permeates the capital markets through gaining a better appreciation for where we are in the economic cycle. The business cycle framework can be divided into four phases: 1) early (recovery); 2) mid (expansion); 3) late (slowdown); and 4) recession (contraction).
Based on current data available, we believe that we are not in the early or late innings of the proverbial game but are rather in the mid and/or late phases of an economic cycle.
Assuming the foregoing is true, it would be appropriate to position your portfolio in those asset classes that will perform best during these phases of the cycle. Historically, portfolios invested with a quality bias will perform better on a relative basis during periods of slowdown and contraction.
A quality factor emphasizes companies with better returns on equity, earnings stability and capital structure. Examples of funds that provide low-cost access to equities that are of a higher relative quality are as follows:
- Vanguard U.S. Quality Factor ETF (VFQY)
- iShares MSCI USA Small-Cap Multifactor ETF (SMLF)
Chief Investment Officer
Derivative markets offer an easy and convenient means for gaining exposure to commodities. A pitfall of investing in a futures-based strategy is the impact of having to reset, or roll, a contract once it expires. The cost of the roll can impact the return, positively or negatively, depending on the shape of the futures curve.
The Bloomberg Roll Select Commodity Index, tracked by the iShares Bloomberg Roll Select Commodity Strategy ETF (CMDY), was designed to help in managing any drag in return, or cost, associated with rolling futures contracts.
In an effort to manage the drag or negative impact from rolling futures contracts, the Bloomberg Roll Select Commodity Index is designed to select the most backwardated contract. As a result, the index may elect to skip the near-term, or front-month, expiration to buy a contract with less long-term impact from roll drag.
While it doesn’t negate the impact of the roll, the approach seeks to diminish the impact, providing investors with an effective solution to gain exposure to commodities.
For commodities-based exposure, we prefer the Bloomberg Roll Select Commodity Index, a derivation of the Bloomberg Commodity index, given what we view to be reasonable constraints on individual commodities and sectors—namely, oil and energy.
In total [CMDY’s index] is composed of 22 commodities with strict constraints on sector exposures. As such, energy only represents roughly one-third of the ETF with agriculture, industrial metals and precious metals composing anywhere between 15-30%. This provides broad-based commodity exposure that’s not overly concentrated in a specific sector or commodity.