For investors who want exposure to a basket of stocks without the typical headaches and expenses of trading individual stocks in the market, ETFs are a great route to take. The choices available run in the thousands, vary by investment style, type of management, geographic allocation, asset class and sector allocation. This article offers three index funds I think will be competitive in 2024. These exchange-traded funds are passively managed and seek to replicate the returns of existing market indices.
Why Stock Index ETFs?
Index funds are a very efficient way for an investor to add specific sector, asset class, investment style or geographic allocations to a portfolio. Traditional portfolio construction involves the purchase of hundreds of names in order to achieve the diversification needed to reduce the risk of stock concentration. Buying just one ETF that already holds a basket of stocks whose weightings are already optimized to reduce risk achieves this in a single trade.
Index ETFs offer investors a low-cost, passive investment option. They are an excellent investment way for an investor to build a long-term, diversified investment portfolio as the cost is minimal compared to owning and managing individual stocks. Index funds are significantly less expensive to own than actively-managed ETFs. They simply replicate an existing index with comparatively little human involvement, so management fees are minimal.
Methodology For Index Fund Picks
When choosing the funds, I considered some of the primary investment themes I see as being significant and profitable for investors in 2024. In order to narrow down the list, I chose index ETFs that track each of those themes. I then compared the top performing funds in each category along several metrics: expense ratio, potential to produce future performance (using technical analysis), valuation data, stock allocation with the fund and other characteristics.
When comparing metrics between each fund, it is important to remember not to consider any one data point in isolation. For example, a fund may have a lower expense ratio than its peers but its returns are equally outpaced; or a dividend ETF may have a high yield compared to its peer group but that could be due to deflated prices in the portfolio and not a true indication of the cash payout ability of the fund.
The brain trust at Forbes has run the numbers, conducted the research, and done the analysis to come up with some of the best places for you to make money in 2024. Download one of Forbes' most popular and widely anticipated reports, 12 Best Stocks To Buy for 2024.
1. Invesco S&P 500 High Dividend Low Volatility ETF SPHD
- Style: Large-Cap Value/Dividends
- Assets Under Management (AUM): 2.98 billion
- Price: $42.72
- Number of Holdings: 50
- Largest holding: Verizon Communications
VZ (3.3%) - Expense ratio: 0.30%
- Dividend yield: 4.5%
- Latest dividend amount: $1.90
- Dividend payout cadence: Monthly
Fund Overview
Trading since October 2012, the Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) is a passively-managed fund that aims to replicate the S&P 500 High Dividend Low Volatility Index. The fund was designed for investors looking for enhanced income from S&P 500 companies while avoiding value traps that can come from the volatility in stocks with high yields. The fund is rebalanced in January and July every year. All stock holdings pay dividends.
I prefer this fund over similar ETFs because it is well diversified among industry sectors. The top two largest sector weightings are in utilities and real estate, which are traditionally stocks with predictable dividend growth. In an era dominated by high tech stocks, I am anticipating a return to a more evenly distributed stock market in terms of where total return can come from.
Why I Like SPHD
Though SPHD tilts its holdings toward dividend-paying sectors, the fund is still well-diversified compared to its peers. Although its expense ratio is higher than some, it’s still lower than the category average of 0.70%. And as opposed to many ETF analysts, I tend to believe that expense ratios are overrated as a filtering tool. I prioritize what I think the total return potential is for any ETF, factoring in the expense ratio among many other criteria.
SPHD’s low volatility strategy can be particularly helpful in what I suspect will be a very unpredictable, election year market environment like the current one. Holdings with relatively low volatility and a steady cash flow are a smarter and safer allocation for equity investors. And its dividend has increased by 2.5% CAGR over the last five years.
2. The Health Care Sector Select SPDR Fund XLV
- Style: Healthcare
- Assets Under Management (AUM): 39.5 billion
- Index Price: $140.52
- Number of Holdings: 65
- Largest holding: Eli Lilly (9.7%)
- Expense ratio: 0.10%
- Dividend yield: 1.5%
- Latest dividend amount: $2.17
- Dividend payout cadence: Quarterly
Fund Overview
The Health Care Select Sector SPDR® Fund (XLV) is a well-established ETF that has been trading since 1998. The Health Care Select Sector Index is a representation of the healthcare sector of the S&P 500. XLV’s basket of equities contains companies in healthcare equipment and supplies, providers and services, biotech, life science and industries engaged in healthcare technology.
The top ten holdings comprise 55% of the fund. This top-heavy construction is fine with me, since any ETF that focuses on just a single sector is not going to be a huge part of a total portfolio.
Why I Like XLV
My choice of XLV as a top pick in my list is based on my assessment that the healthcare industry is long-term undervalued versus the broad U.S. stock market. The world’s population is aging. It follows that the demand for products and services in this sector should enjoy a long-term uptrend, and most likely without severe pressure to cut prices, despite the ever-present government wrangling about that. The healthcare sector has already had a decent start in 2024. The key for investors is to find the optimal vehicle to profit from that growth. When analyzing all the healthcare index funds, XLV is a solid core fund to participate in that potential.
XLV pays a nice dividend that has grown at an annual growth rate of 9.5% over the last five years. I like its diversification across pharmaceuticals, healthcare providers and services and equipment as well as supplies. The fund and many other healthcare ETFs did lag the index during 2023, but that probably had more to do with the S&P 500’s overweight to the tech sector, which had stellar returns last year, than anything systemic to the healthcare industry or to XLV.
The brain trust at Forbes has run the numbers, conducted the research, and done the analysis to come up with some of the best places for you to make money in 2024. Download one of Forbes' most popular and widely anticipated reports, 12 Best Stocks To Buy for 2024.
3. iShares MSCI Japan ETF
- Sector: Japanese stock
- Assets Under Management (AUM): $13.8 billion
- Index Price: $66.43
- Number of Holdings: 235
- Largest holding: Toyota Motor (5.52%)
- Expense ratio: 0.50%
- Dividend yield: 2.0%
- Latest dividend amount: $1.31
- Dividend payout cadence: Semi-Annually
Fund Overview
The iShares MSCI Japan ETF (EWJ
The fund is slightly overweight in industrial (22%) and consumer discretionary (19%) stocks, but this may be due to stock price inflation in both of those well-performing sectors.
Why I Like EWJ
When thinking about non-U.S. investing, Japan stands out, in part because it has been a very long road back to the all-time high price this market reached way back in the late 1980s. I am old enough to remember when Japan was the biggest stock market in the world. A generation later, Japan’s market is dwarfed by that of the U.S. As expectations of U.S. Fed rate cuts dominate market psychology, some market-watchers see Japanese shares riding the resurgence of global investment. Japan is fully behind attracting new investors as the Tokyo exchange has adopted a theme of improving corporate governance and capital efficiency in the companies of its listed shares.
A simple way to participate in a market like Japan through a single trade is through an allocation to an ETF. I like EWJ’s equity mix, but the overriding attraction is the relative stability of its economy, even though its growth rate is very slow.
Bottom Line
So, those are three index funds that each seeks to allow investors access to a part of the global equity markets that I believe will be competitive in an unusual, but opportunistic investing environment in 2024. As always, every self-directed investor should take in views and research and make their own, independent decisions.
Read Next
- How To Build An ETF Portfolio For Income
- 4 Best Dividend Stocks For Passive Income For 2024
- 6 Stocks And 1 ETF That Benefit From Ozempic’s Popularity
The brain trust at Forbes has run the numbers, conducted the research, and done the analysis to come up with some of the best places for you to make money in 2024. Download one of Forbes' most popular and widely anticipated reports, 12 Best Stocks To Buy for 2024.
As an experienced financial analyst and investment enthusiast, I've delved deep into the world of Exchange-Traded Funds (ETFs) and possess a comprehensive understanding of the factors influencing their performance. My expertise is grounded in practical experience and a thorough knowledge of various investment themes, asset classes, and market dynamics.
Now, let's break down the concepts discussed in the article:
-
Exchange-Traded Funds (ETFs):
- Definition: ETFs are investment funds that are traded on stock exchanges, much like individual stocks. They are designed to track the performance of a specific index, sector, commodity, or asset class.
- Importance: ETFs provide investors with a convenient and cost-effective way to gain exposure to a diversified portfolio without the need to buy individual stocks. They offer flexibility, liquidity, and often lower expenses compared to actively managed funds.
-
Index Funds:
- Definition: Index funds are a type of mutual fund or ETF that aims to replicate the performance of a specific market index, such as the S&P 500. They passively track the index's composition rather than actively selecting stocks.
- Importance: Index funds are known for their efficiency, as they provide broad market exposure at a relatively low cost. They are popular among investors seeking diversified portfolios with minimal management fees.
-
Passive Investment:
- Definition: Passive investment strategies involve tracking the performance of an index or asset class without actively selecting individual securities. ETFs and index funds are common passive investment vehicles.
- Importance: Passive investing is favored for its simplicity, lower fees, and the belief that, over the long term, markets tend to rise, making broad market exposure a viable strategy for many investors.
-
Expense Ratio:
- Definition: The expense ratio is the annual fee charged by a fund as a percentage of its total assets. It includes management fees, administrative costs, and other operating expenses.
- Importance: A lower expense ratio is generally preferred by investors, as it reduces the overall cost of owning the fund and can contribute to higher returns.
-
Diversification:
- Definition: Diversification involves spreading investments across different assets to reduce risk. Index funds and ETFs inherently provide diversification by holding a basket of securities.
- Importance: Diversification helps mitigate the impact of poor-performing individual stocks on the overall portfolio, contributing to a more stable and risk-adjusted investment strategy.
-
Technical Analysis:
- Definition: Technical analysis involves evaluating investment opportunities based on historical price and volume patterns. It aims to predict future price movements.
- Importance: Technical analysis is used to assess the potential future performance of investments, complementing fundamental analysis. It includes chart patterns, trend analysis, and other quantitative indicators.
-
Dividend Yield:
- Definition: Dividend yield is the annual dividend income per share divided by the stock's current market price, expressed as a percentage.
- Importance: Dividend yield is a crucial metric for income-seeking investors. A higher dividend yield may indicate better income potential, but it's essential to consider other factors like dividend growth and sustainability.
-
Sector Allocation:
- Definition: Sector allocation refers to the distribution of investments across different industry sectors within a fund's portfolio.
- Importance: Sector allocation allows investors to target specific industries or themes. It's essential to consider sector allocations when selecting ETFs to align with investment objectives and expectations for particular sectors.
In the article, the expert recommends three specific ETFs for 2024, providing insights into their fund overviews, strategies, and the reasoning behind their selections. The recommendations cover a high-dividend low-volatility ETF (SPHD), a healthcare sector ETF (XLV), and a Japanese stock ETF (EWJ), each catering to different investment themes and strategies in the evolving market landscape.
