As actively managed funds have been underperforming, investors have been pouring money into passively managed ETFs. ETF inflows hit a record high of $476 billion in 2017. In the first seven months of 2020, ETF inflows totaled $232 billion. What are the best ETFs to add to your portfolio in 2020?
How to pick an ETF
There are two things to consider when picking an ETF. First, you need to identify which category you want to invest in. You can invest in stocks, bonds, Treasuries, or commodities through ETFs. Then, you need to narrow the search further. For instance, say you want to invest in an ETF that invests in equities. You would need to decide whether you want large-, mid-, or small-cap exposure, and whether you want to have a national or international focus. You may also want exposure to a specific sector, such as tech or banking.
ETFs can cater to all these needs. The one you select should align with your investing needs and risk appetite. For instance, you should keep in mind that sector-focused ETFs are typically riskier than broad ETFs that track indexes such as the S&P 500.
Second, you need to select the best ETF in your chosen category. Good ETFs typically have low management costs, low tracking error, high liquidity, a larger fund size, and low bid-ask spreads. ETFs with low liquidity tend to have higher impact costs (the costs of executing a transaction).
What are the best ETFs in 2020?
If you're looking for ETFs that invest in equities, the following could be good buys in 2020:
- The ARK Innovation ETF, which invests in companies with disruptive technologies.
- The iShares Core S&P 500 ETF, which tracks the S&P 500.
- The SPDR S&P Metals and Mining ETF, which invests in U.S.-based metal and mining companies.
- The Schwab Emerging Markets Equity ETF, which gives you exposure to emerging market equities.
The best commodity ETFs
The SPDR Gold Trust is a good ETF to buy if you want to diversify your portfolio and add gold. The precious metal is among the best performing asset classes this year, and its outlook looks positive. Meanwhile, the United States Oil Fund gives you exposure to WTI and could be a good medium-term bet. While crude oil prices have fallen this year, they should bounce back over the medium term, which would be positive for ETFs that invest in oil.
If you're looking for a fixed-income ETF, you could consider the iShares Core U.S. Aggregate Bond Fund ETF, a diversified play on U.S. investment-grade bond markets. However, you should consider this ETF only if you have a long-term outlook, given its high duration and maturity. If your investment horizon is medium term, the Vanguard Short-Term Corporate Bond ETF looks a good buy. And if your time horizon is shorter than three months, the SPDR Barclays 1-3 Month T-Bill ETF could be a good ETF to buy in 2020.