10 ETFs To Be Thankful For

By Matthew Hougan

The ETF industry has given us a lot to be thankful for: lower costs, better diversification, lower taxes.

In the spirit of Thanksgiving, I thought I would pull together a list of 10 ETFs that have earned my thanks. The list could be much longer: 20, 30 or even 50 ETFs might qualify. But these ETFs have helped shape the ETF industry of today, allowing millions of investors to build better portfolios. As a journalist, they've been fun to write about, too.

1) S&P 500 SPDR (SPY): SPY was the first ETF in the United States and set the stage for everything that followed. It remains the largest and most-traded ETF in the world, delivering complete exposure to the S&P 500 for an expense ratio of just 0.0945%. What's more, it trades at super-tight spreads and hasn't paid a capital gains distribution since 1996. What more do you want?

2) PowerShares NASDAQ-100 QQQQ (QQQQ): This ETF has slipped recently from being the #2 or #3 largest ETF in the world down to the #6 slot. But QQQQ is still a hugely important ETF, and played a tremendous role in the history of ETFs. Back in the 1990s, when SPY was still primarily an institutional tool, QQQQ started seeping into the broader consciousness, catching fire with the retail and trader communities. Without QQQQ, the modern ETF industry wouldn't exist.

3) Vanguard Total Market Index Fund (VTI): This one is all about costs. VTI is the cheapest retail share mutual fund in the world. For 0.07% per year, you can buy exposure to all the stocks in the U.S. That's beautiful. For the record, that is 1/15th the cost of the average mutual fund in the U.S.

4) Vanguard Emerging Markets ETF (VWO): Again, this one is all about costs. VWO proves that emerging markets exposure needn't be costly. The fund charges just 0.25% in annual expenses, compared to 0.75% for the dominant iShares Emerging Market ETF (NYSEArca: EEM) and 1.62% for the average international equity mutual fund (per ICI). Saving 1.37% per year adds up quickly.

5) SPDR Gold Shares (GLD): GLD marked a turning point in the ETF industry. It was the first commodity ETF listed in the U.S., and the first product ever that allowed investors to buy gold directly in a brokerage account. This lowered the cost and hassle of buying gold significantly, and brought a huge new group of investors into the ETF market; after all, you couldn't and still can't get this exposure in a mutual fund. Today, it has more gold than the People's Republic of China. Remarkable.

6) PowerShares DB Commodity Index Fund (DBC): Like GLD, DBC was a ground-breaking ETF in the commodity space. As the first broad-based commodity futures ETF, DBC significantly lowered the costs of accessing commodities and helped move commodities from the fringes into mainstream asset allocations. While a lot of people have been burned by the commodities bubble, long term, I believe people will benefit from the diversification commodities offer.

7) WisdomTree Small Cap Emerging Markets ETF (DGS): DGS was the first small-cap emerging markets ETF; since, at least three other funds have launched. DGS was important because it broke the mold of where index funds and ETFs could operate and where they could not. The old thinking said that index-based strategies couldn't work in illiquid corners of the market, and that active managers could outperform in these areas as well. DGS changed all that, showing that a thoughtfully structured ETF could provide low-cost access to those markets and help investors add a noncorrelated source of returns to their portfolios.

8) NETS Dow Jones Wilshire Global Total Market Index Fund (Ticker TBD): I'm including this ETF even though it has yet to launch. Why? When Northern Trust filed for this fund in 2007, it was the first public filing for a truly global equity ETF—one that held both U.S. and international stocks in a single portfolio. Since then, a number of issuers have launched funds, including the Vanguard Total World Stock ETF (VT). But Northern Trust deserves the credit for breaking the mold, and helping to break down the problem of "home bias" in the investing community.

9) ProShares UltraShort S&P 500 (SDS): Love them or hate them, the ProShares ETFs have reshaped the investment landscape. ProShares' family of leveraged and inverse-leveraged ETFs has attracted nearly $20 billion in assets and huge amounts of trading volume over the past two years. SDS was one of the original ProShares, providing -200% exposure to the S&P 500. I fear a lot of investors misuse these funds, but at the same time, they are very well-designed and very empowering if used correctly.

10) iShares Lehman Aggregate Bond Index Fund (AGG): Bonds are one of the fastest growing segments of the ETF industry, and AGG was one of the first bond ETFs to list. The fund provides broad-based exposure to the fixed-income market for just 0.24% in expenses. Its existence (and the existence of other broad-based equity ETFs) means you can create a full asset allocation portfolio using ETFs and ETFs alone.

That's 10. I could go on all day. How about the CurrencyShares Euro Trust (FXE), for opening up the currency market? How about one of the alternative energy funds for completely opening up the alternative energy market, be it the PowerShares WilderHill Alternative Energy ETF (PBW) or the globally oriented Market Vectors Global Alternative Energy ETF (GEX). Or the Select Sector SPDR ETFs. Or the iShares MSCI EAFE ETF (EFA). Or...

As an investor, ETFs allow me to create a significantly better portfolio at significantly lower costs with significantly less tax exposure than was possible five or 10 years ago.

I'll give thanks for that.

Comments

[GMiki1:]

I don't know, but I bet the only one up for the year will be GLD. We shall see.

2008 Nov 28 11:26 AM

[Roger Knights:]

SDS should be up also.

2008 Nov 28 11:33 AM

[rmaring478:]

What's the difference between the SPY and VFINX?

2008 Nov 28 01:26 PM

[Briggsy:]

rmaring478, I would say the big difference is the ability to trade SPY intraday. You can like it or hate it, and be in and out of it however you want to scale your position, as many times as you want during market hours.

2008 Nov 28 07:10 PM

[Here's a th...:]

SPY is an ETF VFINX is a mutual fund. They both track the S&P500 so performance is about the same.


On Nov 28 11:33 AM Roger Knights wrote:

> SDS should be up also.

2008 Nov 28 09:39 PM

[Anthony Alfidi:]

I'm glad you included VWO. Don't forget that the dividend yield is now close to 4%.

2008 Nov 28 10:48 PM

[CLH:]

A useful article.

2008 Nov 29 11:20 AM

[Camille:]

I enjoyed this article. With the enormous amount of ETF's and indexes now available it is helpful to read about some of the best ones.

2008 Nov 29 03:26 PM

[Dividends A...:]

I think XLK (SPDR Tech) will do well as a long-term investment. It's held up slightly better than the market and moving forward has great diversification in hardware & software companies that businesses & consumers will continue to use.

2008 Nov 30 04:43 PM