The rapid expansion and development of the ETF industry has made it easy and cost-effective for mainstream investors to tap into virtually any asset class. And though there are many products out there that allow investors to add exposure to hyper-targeted markets, most utilize the investment vehicles as core holdings in their portfolios [see How To Pick The Right ETF Every Time].
For ETF investors, core holdings must offer access to a diversified basket of securities. Furthermore, investors look for ETFs that have deep portfolios and few biases toward a particular stock or sector. For long-term, buy-and-hold investors, an ETF’s track record is also a key factor. Last, but certainly not least, cost matters; simply put, the cheaper the better.
Given this criteria, most investors turn to only the largest and most popular funds, such as the SPDR S&P 500 ETF (SPY, A) and the Core Total U.S. Bond Market ETF (AGG, A). A little more research, however, can uncover some of the hidden gems in the ETF industry. Below we highlight 7 underappreciated ETFs that have the potential to make great building blocks for traditional buy-and-hold investors:
This Charles Schwab offering is part of this issuer’s large lineup of ultra-cheap funds, which also are available commission-free on the company’s trading platform. The U.S. Large-Cap ETF (SCHX, A) charges a mere 0.04%, which is 0.05% cheaper than SPY. The fund is designed to represent the largest 750 stocks of the U.S. equities market, with holdings spread out nicely across a wide array of sectors.
Compared to SPY’s over $158 billion in AUM, SCHX is relatively small, but the fund does offer a healthy average daily trading volume of over 350,000 shares [see 101 ETF Lessons Every Financial Advisor Should Learn].
DWM: Developed Markets + Dividends
WisdomTree‘s DEFA Fund (DWM, A-) is the perfect example of a hidden gem in the international equity ETF market. The fund tracks a fundamentally weighted index that measures the performance of dividend-paying companies in the industrialized world. It is comprised of companies incorporated in 16 developed European countries, Japan, Australia, New Zealand, Hong Kong and Singapore.
DWM’s portfolio holds over 730 stocks, spread out over a number of sectors and market capitalization sizes. Currently, its SEC 30-day yield is 3.37%. DWM’s expense ratio comes in at 0.48%, slightly more expensive than iShares’ IEFA and EFA funds. It is, however, available commission free on E*TRADE.
EDIV: Emerging Markets + Dividends
Launched in 2011, the SPDR S&P Emerging Markets Dividend ETF (EDIV, A-) is one of the few ETFs that offers exposure to dividend-paying emerging market equities. The fund features a portfolio of over 120 stocks, with no single country or sector receiving more than a 25% allocation and no single stock more than a 3% weight.
Currently, EDIV features a dividend yield of 5.58%, making it the highest yielding ETF in the Emerging Markets Equities ETFdb category. The fund charges 0.59%, slightly below the category’s average expense ratio.
SCHZ: A Cheap Total Bond Market Alternative
Another Charles Schwab offering, the U.S. Aggregate Bond ETF (SCHZ, A) tracks the popular Barclays Capital U.S. Aggregate Bond Index, which invests in a wide spectrum of public, investment-grade, taxable, fixed income securities in the U.S. The popular BND and AGG funds also track the same index, though both are more expensive than SCHZ.
The fund charges a mere 0.05% and is available commission-free on Charles Schwab. Currently, SCHZ has over $550 million in AUM and an average daily trading volume of roughly 93,000.
TILT: A Compelling Quant
The Morningstar US Market Factor Tilt Index Fund (TILT, A-) looks to give investors a fundamental approach to broad market investing. The fund seeks to enhance exposure to the broad U.S. stock market by tilting the portfolio toward the long-term growth potential of the smaller cap and value segments. This is done by applying a multi-factor modeling approach that aims to enhance portfolio risk/return characteristics.
Given the methodology, TILT’s portfolio is vastly different from traditional market cap-weighted funds. It holds over 2,500 individual holdings, which are nicely spread out across a wide range of market capitalization sizes. The fund charges 0.27%, making it one of the least expensive “quant” based funds.
RPV: A Focus on “Pure” Value
The S&P 500 Pure Value ETF (RPV, C+) is one fund in Guggenheim‘s lineup of “Pure Style” ETFs. Unlike traditional style ETFs, RPV seeks to remove the overlap between growth and value by identifying only those companies with the strongest value characteristics.
Given the strict criteria, RPV’s portfolio holds only 120 individual securities, the majority of which are large- and mid-cap stocks. A look at its track record, however, certainly gives credit to the “pure” methodology. RPV’s small- and mid-cap counterparts, RZV and RZV, are also compelling options for those wanting to add exposure to smaller capitalization equities [see The ETF Performance Visualizer].
RYJ: The “Strong Buy”
Another Guggenheim offering, the Raymond James SB-1 Equity ETF (RYJ, C+) is one of the most interesting quant-based products on the market. RYJ utilizes a dynamic stock selection process that requires each security to hold a Strong Buy 1 (SB-1) rating from Raymond James & Associates.
The ratings are calculated based on a number of factors, including both quantitative analysis and analyst evaluation. Although this fund is classified as a passive ETF, the composition of its underlying portfolio is greatly influenced by human judgment and therefore its performance is also reliant on the accuracy of the Raymond James analysts. RYJ’s solid performance over the past years, however, gives credit to these analysts.
The Bottom Line
As always, a little extra research has the potential to uncover some of the hidden gems in the ETF industry. The seven underappreciated ETFs we highlighted in this piece are just some of the many ETFs that have the potential to make great building blocks for traditional buy-and-hold investors.
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Disclosure: No positions at time of writing.