Over the last decade, passive investing has gained popularity and their ownership of U.S. stocks surpassed that of active funds for the first time in 2021. Their simplicity and low-cost structure make passive funds an attractive investment option. While index funds and ETFs are the most popular passive investing vehicles, ETFs can be both passive as well as active. What are the best ETFs to invest in right now?
Even Berkshire Hathaway chairman and legendary value investor Warren Buffett advised investors to invest in low-cost index funds. The conglomerate has also invested some money in S&P 500 ETFs.
What should you look at before investing in an ETF?
While selecting an ETF, you need to look at various metrics. First, the ETF’s investing strategy should match your goals. ETFs are a diverse asset class and there are debt, equity, commodity, and international equity ETFs.
Once you have selected the fund category, you need to select the ETF from within the category. Unlike active funds, the returns of passive funds in the same category are similar. However, there are other aspects that you need to watch. These include the expense ratio and liquidity.
What are the best ETFs to invest in right now?
Looking at the current macro environment, we're in a rising rate cycle and the Fed has raised rates by 225 basis points so far in 2022. The U.S. Central Bank is expected to raise rates even higher to tame inflation. The U.S. economic growth has also slowed down and the economy contracted in the first and second quarters of 2022.
Some sectors of the economy like housing, chipmakers, metal and mining companies, and discretionary products are facing slowdown blues. Under the current environment, defensive stocks and stocks with high dividend yields look like good investments. Gold could also be a good investment as markets expect the Fed to go slow on its rate hikes.
The following ETFs look like good investments right now.
- the Schwab U.S. Dividend Equity ETF (NYSE: SCHD)
- the Invesco S&P 500 High Dividend Low Volatility ETF (NYSE: SPHD)
- the SPDR Gold Trust (NYSE: GLD)
While the first two ETFs invest in large cap, value-oriented dividend stocks, GLD invests in physical gold and seeks to track the price action of gold after adjusting for expenses.
Investing in large cap, value-oriented dividend stocks can pay off.
The Invesco S&P 500 High Dividend Low Volatility ETF invests at least 90 percent of its assets in the S&P 500 Low Volatility High Dividend Index. It has a 30-day SEC yield of 3.94 percent and an annual expense ratio of only 30 basis points. The ETF outperformed the S&P 500 by a wide margin in the first half of 2022 as dividend and value stocks outperformed the markets.
The Schwab U.S. Dividend Equity ETF has a large cap bias and has 104 holdings with a weighted average market cap of just above $121 billion. Its PE multiple of 14.38x is below that of the S&P 500. The ETF has a 30-day SEC yield of 3.31 percent, which looks healthy. The ETF tracks the Dow Jones U.S. Dividend 100 Index and has an annual expense ratio of only 6 basis points.
Gold ETFs can be a savior.
Gold’s outlook has been mixed. While the Fed’s rate hikes and a stronger U.S. dollar are negative for gold, the economic slowdown, high inflation, and geopolitical turmoil are positive for gold.
However, amid the current environment, it would make sense to allocate some funds to gold. GLD is among the best ways to get exposure to gold given its high liquidity.