Market Pulse: ETFs for the long term
There is a new TV commercial from an investment adviser who also hosts a radio program. In the commercial he recommends funds with very little turnover in order to reduce or eliminate taxes.
That was good advice in the 1990s, but by holding Exchange-Traded Funds instead of mutual funds you can avoid those taxes altogether. ETFs with low turnover have a big advantage for investors with taxable accounts.
Buying and holding a good ETF has been both very easy and very difficult. It’s easy because the market has gone up (190% over 10 years). But staying invested is difficult when the market is volatile and can fall 34% in one month as it did in February/March.
For those who are under 60 and are investing for long-term growth, there are many low-cost index ETFs. Here are three good buy-and-hold ETFs:
Why buy several ETFs to gain diversification when you can hold the entire market in one security? The iShares S&P Total Stock Market ETF (ITOT) gives investors broad exposure to the U.S. stock market for an incredibly low 0.03% in annual expenses. In other words, a $100,000 investment will give you exposure to small and large-cap stocks and will only cost $30. Amazing.
Historically, companies that pay and increase dividends each year have outperformed the S&P 500 with lower volatility. That’s especially true if you limit the choices to large-cap stocks.
That’s why I like ProShares S&P 500 Dividend Aristocrats (NOBL). This ETF owns 66 of the S&P 500 companies with the longest track records of year-over-year dividend growth (usually 25 years or more). The Industrial stocks represent one-quarter of the fund’s holdings. The one downside of this fund is its 0.35% management fee. Given the low turnover, the expense ratio should be less.
A bit more growth oriented is Vanguard’s Dividend Appreciation ETF (VIG). It holds companies (even ones outside of the S&P 500) that increase their dividend almost every year.
Consumer Services is the largest sector holding and this fund holds 225 stocks. Walmart, Microsoft, and Johnson & Johnson are its three largest holdings. The expense ratio for this ETF is only 0.06%.
Of course buying and holding these ETFs for the long run is easier said than done. Investors with the best intentions often end up panicking when the market falls. Many did in March.
As counterintuitive as it may seem, investors who don’t frequently track their broad-based index funds often do better than those who closely follow the market.
David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Consult your financial advisor before purchasing any security.
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