By Tezcan Gecgil, PhD
(Prices are as of Aug. 22, 2020)
An exchange-traded fund (ETF) typically tracks returns on a buy-and-hold basis. So it is a passive investment approach. An ETF, also known as an index fund, is a basket of assets — some combination of stocks, bonds and commodities. Many of these ETFs track various indices and help investors diversify their portfolio holdings.
These funds have risen in popularity due to their low transaction costs and intraday liquidity. And even in these uncertain times, new investors are wading into the stock market and to index funds.
According to recent research led by Travis Box of Clemson University, “ETFs are tax efficient, transparent and they allow investors to move in and out of positions throughout the day. The proliferation of ETFs has coincided with, and perhaps even encouraged, a shift towards low cost indexing strategies.”
With all that background information, I believe these two exchange-traded funds could be appropriate for many beginning portfolios.
- SPDR S&P 500 ETF (NYSE:SPY)
- Vanguard Total Stock Market ETF (NYSE:VTI)
ETF for long-term portfolios: SPDR S&P 500 ETF (SPY)
- Current Price: $339.48
- 52-week range: $218.26-$339.72
- Dividend Yield: 1.69%
- Expense Ratio: 0.04% per year, or $4 on a $10,000 investment.
When investors think of the US markets, the S&P 500 is usually the first index they think of. It is also known as the “Spider.” Over the decades, it has is become of the most widely followed equity benchmarks in the world.
As the name implies, it measures the stock performance of the largest publicly-traded 500 companies in the US. These businesses make up around 80% of the overall US stock market’s value and cover approximately 24 separate industry groups.
The capitalization-weighted SPDR S&P 500 ETF follows the S&P 500 index. I believe, most investors would find the value proposition of the SPY index simple: investors gain exposure to the growth and profitability of a range of U.S.-based firms. Yet they do not have to rely too heavily on any individual company’s performance.
The index has recently made a new high, recovering all of its initial losses for the year. As we get ready to start September, there may be some short-term profit-taking in the ETF. Long-term investors may regard and dip in price sas opportunity to go long the fund.
ETF for long-term portfolios: Vanguard Total Stock Market ETF (VTI)
- Current Price: $172.22
- 52-week range: $109.49-$172.56
- Dividend Yield: 1.68%
- Expense Ratio: 0.04% per year, or $4 on a $10,000 investment
Exchange-traded funds offered by Vanguard have become extremely popular, due to their low cost and exposure to a wide range of sub-investment themes. Similarly, VTI also offers easy access to a broad basket of shares under one umbrella.
The fund tracks the performance of the CRSP US Total Market Index. It currently holds 3531 stocks covering all sectors and capitalizations, from mega- to micro-, in U.S. equity markets. Technology tops the list with a weighting of 26.4%, followed by Financials (16.3%), Consumer Services (14.2%) and Health Care (14.0%).
The fund’s top 3 holdings include Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN). The top ten stocks comprise close to a quarter of VTI.
So far in the year, the Vanguard Total Stock Market ETF is up 5.26%. However, that metric excludes the current dividend yield of 1.68%. Academic research and long-term investing evidence show that those who purchase dividend stocks and reinvest the dividends to buy more stocks are likely to see considerable growth in their savings over long periods.
VTI has almost recovered all of its losses from the selling we have witnessed in March. And like the SPY, it may soon make a new all-time high. Long-term investors buy consider buying the fund if there is short-term profit-taking. $160-level or below could offer considerable value.
