12 Best ETFS To Buy For 2023
This list of the best exchange-traded funds (ETFs) to buy for 2023 features diversified funds. We’ve further fine-tuned our selections by identifying funds that have proven their mettle by posting top-notch total returns over five years. That avoids flash-in-the-pan funds that may have outperformed over just, let’s say, the past 12 months but don’t have what it takes to excel in the long run.
What else does it take to be among the 12 best ETFs for 2023? Low cost and decent yield are two more desirable traits. In addition, we’ve confined our selections to ETFs with $100 million or more in assets. Data is from Morningstar Direct, reflecting performance through February 28, unless otherwise noted.
1. Vanguard Total Stock Market ETF (VTI
• Expense Ratio: 0.03%
• Dividend Yield: 1.6%
• 5-Year Avg. Annual Return: 9.4%
Vanguard Total Stock Market ETF is the keystone ETF for a portfolio of the best ETFS to buy now. Why? No other fund matches its breadth and success. The $275.6 billion fund held a whopping 3,969 stocks as of January 3, Vanguard says. Its average annual return over the five years ended February 28 was 9.4% vs. 9.8% for the big-cap bogey itself. Its annual expense ratio is a rock bottom 0.03% vs. 0.04% for Vanguard 500 Index Admiral (VFIAX), a widely held mutual fund proxy for the S&P 500.
VTI’s trailing 12-month dividend yield was 1.59% vs. 1.58% for VFIAX. VTI’s wide array of holdings gives you exposure to growth as well as value stocks.
2. Vanguard Dividend Appreciation ETF (VIG
• Expense Ratio: 0.06%
• Dividend Yield: 2.0%
• 5-Year Avg. Annual Return: 10.2%
Many diversified U.S. stock funds that outperformed over the past 12 months prioritize offering high income to shareholders. VIG tracks the S&P U.S. Dividend Growers Index. That means its sights are locked onto large-cap stocks with a record of growing their dividends year over year for at least 10 years in a row. And it sports a very low expense ratio of 0.06%.
Still, the $64.2 billion fund does not hold stocks that pay the highest dividends. Instead, VGI aims to reduce risk in this fund by not buying the top quartile of highest yielding companies in its source index. Stocks already in the ETF are only kicked out if they are in the index’s top 15% of highest dividend yielders.
“The idea is to eliminate the stocks that are most likely to cut their dividends,” says Bryan Armour, director of passive strategies research, North America, for Morningstar Research Services. Those stocks may have artificially high yields because some underlying problem has caused their share price to fall.
3. Vanguard High Dividend Yield ETF (VYM
• Expense Ratio: 0.06%
• Dividend Yield: 3.0%
• 5-Year Avg. Annual Return: 8.1%
Want an ETF that’s even more aggressive than VIG in its pursuit of yield? If you’re comfortable taking more risk, then $49.2 billion VYM may be right for you.
VIG avoids the highest yielding stocks in its selection pool. The fund does the opposite, basically. “VYM ranks all U.S. large- and mid-cap dividend-paying stocks [in a different index] according to their projected 12-month yield, then cuts off the bottom half,” Armour said.
Not surprisingly, VYM’s yield currently is higher than VIG’s. But its average annual return over the past five years is more than two percentage points lower.
IVZ S&P SmallCap Value with Momentum ETF (XSVM
• Expense Ratio: 0.36%
• Dividend Yield: 1.7%
• 5-Year Avg. Annual Return: 13.6%
Looking for a fund that puts the pedal to the metal? Kick the tires on Invesco S&P SmallCap Value with Momentum ETF as you search among the 12 best ETFs for additions to your portfolio.
This $739 million ETF looks for value stocks whose share prices rise faster than certain peers.
XSVM is composed of about 120 securities in the S&P SmallCap 600 Index that have what Invesco calls the highest “value scores” and “momentum scores.” Basically, XSVM picks equities that best meet its idea of a value stock and show the best momentum versus certain other members of the index.
This fund has the best five-year average annual return, 13.6%, of all small-cap equity ETFs tracked by Morningstar Direct over the past five years. Bear in mind, momentum style investing can be volatile.
5. Invesco Russell 1000 Dynamic Multifactor ETF (OMFL
• Expense Ratio: 0.29%
• Dividend Yield: 1.5%
• 5-Year Avg. Annual Return: 13.8%
The broad market in the form of the S&P 500 had a tough go of it over the past 12 months, posting a loss of 7.7%. Invesco Russell 1000 Dynamic Multifactor ETF went in the opposite direction, scoring a gain of 2.2%.
How did the $2.5 billion ETF manage that? OMFL is based on the multifactor index in its own name. Managers of OMFL can emphasize “factors” in their benchmark that they think will help lift EMFL’s performance. Industrial, consumer discretionary and financial stocks are OMFL’s largest sectors as of its latest disclosure. Those were also the top-performing sectors from May 27 through March 3, according to CFRA Research.
OMFL’s five-year average annual gain of 13.8%, best among large-cap ETFs in that span, make this one of the best ETFs to buy for 2023.
6. Invesco Zacks Multi-Asset Income ETF (CVY)
• Expense Ratio: 0.89%
• Dividend Yield: 4.9%
• 5-Year Avg. Annual Return: 4.7%
Target date funds are increasingly popular. Shareholders like letting professional managers pick their investments and shift from riskier stocks into more stable bonds and cash as the target date nears.
One glitch: target date ETFs barely exist. That’s because ETFs were long barred from 401(k) plans. They’re still very rare in that space. But asset allocation ETFs can perform the same job in your portfolio. The main difference is that instead of holding one fund whose asset mix adjusts over time, you’d have to shift from one target risk ETF to another over time to end up with an increasingly more cautious stew of stocks, bonds, and cash. Asset allocation funds are typically categorized according to how aggressive they are. The more stock that an ETF holds, the more aggressive it is.
The $102.9 million CVY is in Morningstar’s aggressive allocation category because it typically has 85% or more of its shareholders’ money at work in stocks. The fund holds stock-like American depositary receipts (ADRs), real estate investment trusts (REITs), master limited partnerships (MLPs), closed-end funds and traditional preferred stocks. CVY’s dividend yield is 4.9%, more than double the S&P 500’s.
7. iShares Core Growth Allocation ETF (AOR)
• Expense Ratio: 0.12%
• Dividend Yield: 2.1%
• 5-Year Avg. Annual Return: 3.9%
The $1.9 billion AOR is deemed a moderate allocation fund because it puts 50% to 70% of its shareholders’ money into stocks. And it invests in other iShares ETFs rather than in their underlying securities directly. That dampens costs.
About 38% of its money is at work in fixed income. Its top holding by weight is iShares Core Total USD Bond Market ETF (IUSB
8. iShares Core Moderate Allocation ETF (AOM
• Expense Ratio: 0.15%
• Dividend Yield: 2.2%
• 5-Year Avg. Annual Return: 2.8%
Despite the word “moderate” in the fund’s name, this $1.4 billion iShares ETF is in Morningstar’s cautious allocation category because it keeps 30% to 50% of its shareholders’ money in stocks.
This is another iShares fund of funds. IUSB is the largest single holding, accounting for about 51% of AOM’s assets. IShares Core S&P 500 ETF (IVV
9. Nuveen ESG Large-Cap Growth ETF (NULG
• Expense Ratio: 0.26%
• Dividend Yield: 0.4%
• 5-Year Avg. Annual Return: 12.9%
Want a fund that does well while doing good? Check out $984.2 million NULG. The fund seeks stocks that satisfy certain social, environmental and governance (ESG) standards reflected by the TIAA ESG USA Large-Cap Growth Index.
NULG’s average annual return over the past five years was 12.9%. That tops the S&P 500 by more than three percentage points. That also makes NULG the highest ranking ESG ETF in our screen based on five-year average annual return.
NULG’s outperformance over the past five years helps make up for its modest income stream. Its trailing 12-month yield is just 0.4%. You can always liquidate shares to generate income, especially since they’re growing in value faster than the overall market
10. VictoryShares USAA Core Short-Term Bond ETF (USTB
• Expense Ratio: 0.32%
• Dividend Yield: 2.7%
• 5-Year Avg. Annual Return: 2.2%
To pick the best ETF for the fixed income segment of your portfolio, ask yourself: Which type of bond ETF has the best prospects right now? Answer: those that focus on shorter-duration bonds. That’s because prices of bonds with longer-dated maturities are generally depressed now due to high inflation and rising interest rates.
Investors don’t want to get stuck with bonds whose fixed payments are worth less as inflation rises.
For additional risk control, limit your hunt to investment-grade short-term bond ETFs. The fund with those traits plus the best five-year average annual return is VictoryShares USAA Core Short-Term Bond ETF (USTB), at 2.2%. Also, it’s up nearly 1% so far this year. The $454.5 million ETF sports a 2.7% yield, tops among funds in the category that have been around five years or more.
11. iShares Investment Grade Bond Factor ETF (IGEB
• Expense Ratio: 0.18%
• Dividend Yield: 3.6%
• 5-Year Avg. Annual Return: 1.8%
Rising interest rates have hurt returns for intermediate-term bond ETFs, making them relatively less attractive for now. But proper portfolio planning requires preparing for the future. Before you know it, you’ll want to regularly check on the progress of your mainstream, diversified, intermediate-term bond ETF. The best ETF to fill that role (without also holding bond-like preferred stock) is the $235.5 million iShares Investment Grade Bond Factor ETF (IGEB).
Its 1.8% average annual return is best among intermediate-term investment-grade bond funds over the past five years. All of the ETFs holdings are rated BBB or higher. Nearly all are corporate bonds. IGEB’s benchmark is the BlackRock
This ETF says its goal is to mitigate risk, pursue income, and enhance total return.
12. FlexShares iBoxx 3-Year Target Duration TIPS Index ETF (TDTT
• Expense Ratio: 0.18%
• Dividend Yield: 6.4%
• 5-Year Avg. Annual Return: 2.8%
High inflation haunts the markets. It is a key culprit in the stock market’s setback of about 8% over the past 12 months. One way you can fight back is with an ETF designed to counter inflation. FlexShares iBoxx 3-Year Target Duration TIPS Index ETF (TDTT) holds Treasury inflation-protected securities (TIPS), which increase in value as inflation rises.
This $2 billion ETF aims to generally keep pace with inflation. The fund’s mandate allows it to hold TIPS with maturities ranging from one to 10 years. In fact, its TIPS have a weighted average maturity of just 3.5 years. That focus on shorter maturities can shave the ETF’s yield relative to its benchmark, but it also lowers its inflation risk.
Who Are ETFs For?
ETFs are baskets of investments, consisting of stocks, bonds, cash and sometimes other securities. They can mix different types of investments, such as stocks and bonds, or focus on just one asset class.
Also, they can specialize in assets from a single industry or geographic market or they can be broadly based. Either way, because they hold many securities, they provide instant, built-in diversification.
Diversification cuts your investment risk by spreading your bets. It reduces your vulnerability to a setback by any single security.
In addition, ETFs are often based on a specific index or group or securities. That simplifies the process of deciding which holdings go into any such ETF. In turn, that means that each shareholder is hit with smaller yearly bills for their stake in the fund.
So, ETFs are for any shareholder who does not have the time, expertise or interest in choosing their own individual securities. ETFs are also for any shareholder who wants their portfolio to be as low-cost as possible.
Key Considerations For ETFs
ETFs provide shareholders with diversified investments. In the case of index-based ETFs, they are often lower-cost than comparable mutual funds, many of which are actively managed.
Like stocks, ETFs can be bought and sold throughout the trading day. As a result, their prices are subject to change throughout the day. Most ETFs disclose their holdings daily. In contrast, mutual funds must disclose their holdings quarterly. Some do so monthly. They’re allowed to delay disclosure for up to 60 days. Most disclose holdings 30 days after a quarter ends.
ETFs that are based on an index may not buy and sell securities often. That reduces their costs. It also makes them more tax efficient for shareholders.