Exchange-traded funds have made it easier than ever for people to invest, and their low costs enable investors to tailor the market exposure they want in their portfolios without losing too much money to investing fees. After a strong 2017, many investors are ramping down their expectations for 2018. But the best way to approach the coming year is to stick with the same strategy that has worked over the long run: Keep a core of all-weather ETFs and supplement it with modest positions based on short-term market conditions. The five following ETFs provide both a core portfolio for the long haul as well as a bet on a couple of possible winning sectors in 2018.
ETF | Assets Under Management | Expense Ratio | 5-Year Average Annual Return |
|---|---|---|---|
Schwab U.S. Broad Market (SCHB 0.54%) | $11.3 billion | 0.03% | 14.2% |
Schwab International Equity (SCHF 0.03%) | $13.1 billion | 0.06% | 8% |
Vanguard Dividend Appreciation (VIG 0.20%) | $27 billion | 0.08% | 13.5% |
Fidelity MSCI Materials (FMAT 0.20%) | $283 million | 0.08% | 9.6%* |
Vanguard Energy (VDE 0.33%) | $4 billion | 0.10% | 1% |
Data source: Fund providers. * 3-year average return; fund inception was Oct. 21, 2013.
Building a strong core
The key to nearly any portfolio's success is having appropriate exposure to the stock market. Although some expect markets to pull back in 2018 after a long nine-year bull-market run, the same expectations last year caused many investors to miss out on the strong returns that 2017 provided. A long-term strategy involves finding good investments and sticking with them rather than trying to time entries and exits based on market conditions, and it's prudent to invest most of your money with such an approach.
The two aforementionedSchwab ETFshave low costs as their primary selling point. The U.S. Broad Market fund concentrates on stocks of all sizes in the U.S. market, while the International Equity fund fleshes out your portfolio with foreign company stocks. If you believe that international markets will play catch-up with the soaring U.S. market, then a relatively healthy allocation to the international ETF could amplify your return potential. Still, most U.S. investors keep the majority of their assets in domestic stocks, and the Schwab ETFs let you do that with a minimum of expense -- including commission-free trading if you have a Schwab brokerage account.
Paying dividends
Recently, dividend stocks have done particularly well, as investors who need to draw income from their portfolios have had to turn to the stock market because of rock-bottom yields in bonds and other fixed-income investments. ETFs focusing on dividend stocks have become popular, and Vanguard's offerings of dividend ETFs offer a couple of different philosophies with respect to dividend investing.
Vanguard Dividend Appreciation's primary objective isn't to maximize dividend yield but rather to select the stocks that have the best combination of dividend growth over time and current income. Many investors have discovered that by concentrating on such stocks, they see the amount of dividend income they receive rise dramatically over the years. Companies that raise their dividends consistently also tend to have consistent track records of fundamental growth, and that combination often results in strong share-price increases as well. Solid total return prospects make the Vanguard dividend ETF a good low-cost choice for income investors.
Making a play on energy and materials
For 2018 in particular, ETF investors might want to consider which sectors of the market are likely to perform the best given current conditions. Materials and energy have had to overcome substantial obstacles in past years, but there's new reason for optimism about the stocks in these sectors.
For materials, poor performance in the commodities markets broadly caused trouble for many companies in the recent past. Yet with the likelihood of increased spending on construction and infrastructure both in the U.S. and in other areas of the world seeking to stimulate their local economies, demand for materials is likely to increase. The Fidelity materials ETF has already enjoyed a nice price rise in 2017 because of anticipation of greater demand, but recent events in Washington suggest that the federal government could have enough momentum to pass an infrastructure spending bill that would make those hopes a reality.
Meanwhile, the energy sector has remained subdued, as oil prices haven't been able to recover to where they were before their plunge in late 2014 and 2015. Energy companies have responded, however, by making smart cost-containment moves and focusing their efforts on the assets that have the best potential for success. Meanwhile, prices have already doubled from their worst levels in 2016, and greater economic prosperity could bring further gains in the coming year. Vanguard Energy has a good cross-section of stocks in the exploration and production, refining, pipeline, and energy marketing businesses, and its low expenses make it a strong choice for those seeking to profit from an energy rebound.
Invest well in 2018
There are no guarantees in investing, and it'll be tough for 2018 to live up to the high performance that 2017 gave investors. Yet as part of a strategy that includes long-term core exposure and some modest bets on current conditions, these five ETFs have the potential to deliver good returns for investors both in 2018 and beyond.
Dan Caplinger owns shares of Vanguard Dividend Appreciation ETF and Vanguard Energy ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
