5 Best ETFs to Buy and Hold | How do ETFs Make Money?
Running Time: 7 minutes
SPY and QQQ could have made me how much money last year? Oh boy, was I doing it all wrong.
If you’re curious about the best ETF’s to buy and hold, then this video is for you. Really quickly though, let’s have a look at what exactly an ETF, Exchange Trading Fund, actually is.
What Is an ETF?
Similar to a mutual fund, a single ETF stock already contains a preselected collection of stocks or bonds, usually in a related field. It could be focused on a specific industry like biotech, technology, cryptocurrency, or even a particular index such as the S&P500. From gold to McDonalds, there is an ETF for everything. The strong benefit to owning ETF stock, as opposed to the single company outright, is that if a single stock or bond in the collection is performing poorly, there’s a good chance that another is performing well, which helps minimize your overall losses.
How ETF Investing Works
Over the last few years, there’s definitely been a boom in the amount of people gravitating towards EFTs, and there are many different reasons for it. Number one being that it’s a low-cost way to invest, while still keeping you diversified. By their nature, they reduce a huge amount of the risk factor that is typically associated with stocks.
Let’s say you like Facebook, Amazon, Netflix and Google (otherwise known as FANG); and you would like to own stock in all four. That would cost you around $6500 based on my current market prices. That’s a lot of money for only four stocks. However, you could simply purchase QQQ at $340, VUG at $280, or IWF at $260. Each of these three ETFs include the afore mentioned stocks as part of its portfolio. The ETFs buy into the expensive stocks, and you buy into the affordable ETF, which gives you exposure to a percentage of the stocks inside of it.
This means that when the individual stocks go up, the ETF can go up as well. They also pay out the dividends for the included stocks. This allows you to simply put money into a single ETF, and let the ETF do the heavy lifting of what should or should not be included in the portfolio.
Differences Between ETFs
Globally, the two biggest ETF providers out there are Black Rock with over 380 ETFs, and Vanguard with over 70 different ETFs. To amplify all this, there are another 100 ETF Issuers, that each offer their own set of ETFs. This can easily get crazy confusing, so let’s look into how to narrow down your options.
Three very popular options are SPY, IVV, and VOO which all include the top 500 Companies in the USA. All three of these trends very closely to each other. The down side with these ETF’s are that the Annual Yields are only around 1.40%. This means they only pay about $5.50 in yearly dividends. You can literally make more money recyclable bottles. While they may be very safe for investing, after 50 years the payout per share isn’t very much. To retire with a million dollars, you would need for each of these ETFs to grow in actual value, gradually over time, then reinvest the dividends back into the ETF.
Conceptually, you may be better suited to start with SDIV, which has an Annual Dividend Yield of 6.70%. The price is only $14 instead of $400 each, this means you could buy 27 shares for the same money, and get a return of $26.80/yr. HOWEVER, the market is never as predictable as that. After the crash of 2020, SPY has catapulted past it’s market low of $218, and is now valued at $200 more per share. SDIV only came back a comparable $162. So, in the short run, SPY would have been a more valuable asset.
The real lesson here is diversification. Since you never know which stock is going to skyrocket or fall, you should spread your money around into different types of ETFs. You could put money into DVYE and enjoy a 4.81% return, or SDEM at 5.64%, but they are a newer funds, therefore harder to predict where they are going.
Remember that if a stock is going to pay a dividend, then they are less likely to grow in stock value. For example, McDonalds was $225 at the start of 2020, and now a year later it’s $235. Meanwhile Tesla does not pay out dividends, instead they put the money into research and development, which is what keeps people buying the stock; it’s future potential. This is where the risk vs. reward comes into play.
The 5 Best ETFS to buy and hold
With all these things in mind, here are my top recommended ETFs for the long term.
- iShares MSCI USA Min Vol Factor ETF – (Ticker Code: USMV) – If stability is the name of your game, then this is the ETF for you. If you are afraid of another stock market crash, then this ETF will keep your mind at ease. It focuses on the biggest and most stables companies like PepsiCo and Merk Pharmaceuticals. The overall price won’t turn into a rocketship making you thousands, but if you’re older and need to keep your life’s savings somewhere secure, then this should still make you some money on the side… better than a Savings account, anyway.
- Vanguard Growth ETF (Ticker Code: VUG) – This ETF focuses on companies that are growing faster than their peers. However, they are not focused on any targeted sector, it’s simply all about how fast the company is growing. From Tech, to Brick and Mortar, to Rail Roads; it doesn’t matter as they are all fair game. Growth stocks are just that, growing; so it’s going to take them some time to mature. But the up side is that they are all fundamentally strong, and will hold their value in the long run.
- Vanguard Information Technology (Ticker Code: VGT) – If your big on Tech Companies, then look no further than VGT. The list of stocks they follow are focused on the biggest 340 companies in the technology sector. However, there IS more of a risk here. You will have the opportunity to win big, just as easily as big loses too. However, if you’re young, time is on your side, and you can be more aggressive with your choices by taking on more risk.
- SPDR S&P 500 ETF (Ticker Code: SPY) – This is the largest for a reason. While it may not pay out much for dividends, it IS tracking the top 500 companies. There will always be winners and losers for stocks, this is why going with SPY is great, because all of the biggest companies will be covered. Nearly everybody has SPY in their stock portfolio.
- Invesco QQQ ETF (Ticker Code: QQQ) – This ETF follows the NASDAQ top 100 USA Companies. This fund returned nearly three times as much as SPY in 2020, because they took their available funds, and invested into 100 winners, instead of 100 winners and 400 losers like SPY. Keep in mind, that just because a stock is in the top 500, they are not created equal. By comparison, it’s the top 10% of the companies that keeps the other 90% afloat. The way I see it, staying focused on the best companies, will yield the best results.
I have another video that also digs deep into ETFs. If you want to learn more about them, and my top picks for last year, then give that video a watch as well. Hopefully this clues you in about what ETFs are and which ones to keep an eye on according to your own personal goals.