If you're an investor who favors the buy-and-hold strategy of letting carefully vetted investments accumulate meaningful returns over time, index-based exchange-traded funds (ETFs) may be the right vehicle for you. Even investing icon Warren Buffett knows it's difficult to beat index funds, which is why he famously mandated that 90% of the money he bequeaths his wife be invested in an S&P 500 fund.
Of course, you don't have to be like Buffett and park all of your cash in an index fund. But as long-term investments go, these vehicles are an attractive and typically low-cost choice for both large and small investors. Trading an index via an ETF is considered more flexible and convenient than doing so with a mutual fund because ETFs trade on a stock exchange like common stocks.
Key Takeaways
- Exchange-traded funds (ETFs) own underlying assets and divide ownership of those assets into shares, which investors may buy and sell through a brokerage firm.
- Overall, ETFs are lower-cost and more tax-efficient than similar mutual funds.
- An index fund, whether an ETF or a mutual fund, is designed to mirror the performance of a popular index, like the S&P 500 Index or the Dow Jones Industrial Average.
- All three of the top ETFs for the best 10-year return focus on semiconductor companies; one is also a chip index fund.
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What Is an ETF?
Like a mutual fund, an ETF is a pool of money that invests in stocks, commodities, bonds, or a basket of other assets. Unlike mutual funds, ETF shares trade like common stock on an exchange. Meanwhile, index funds are designed to track the performance of benchmarks, such as the S&P 500 Index, or a group of stocks.
If you're a long-term investor planning a portfolio and seeking to add index funds to the mix, there are many to choose from. Below are three of the best ETFs based on 10-year total return. All numbers below are as of June 16.
1. The VanEck Semiconductor ETF (SMH)
- Issuer: VanEck
- Assets under management: $9.4 billion
- Ten-year performance: 24.0%
- Expense ratio: 0.35%
SMH tracks the 25 largestsemiconductorcompanies listed in the U.S. The top three holdings of the fund are Nvidia (NVDA), Taiwan Semiconductors Co. (TSM), and Broadcom Inc. (AVGO). Nearly 70% of the fund is composed of its top 10 holdings, making it a large-capitalization-focused ETF. The fund is entirely made up of U.S. companies. SMH would be considered the most liquid of these three funds, with a three-month average volume of more than 7 million.
2. The iShares Semiconductor ETF (SOXX)
- Issuer: BlackRock Financial Management
- Assets under management: $8.6 billion
- Ten-year performance: 23.9%
- Expense ratio: 0.35%
SOXX provides exposure to 30 of the largest semiconductor companies listed in the U.S. The top three holdings that comprise 24% of the fund are Nvidia, Broadcom, and Advanced Micro Devices Inc. (AMD). The fund, like SMH, has risen nearly 50% year-to-date partially due to Nvidia's share price tripling in the same period.
3. The Invesco Dynamic Semiconductors ETF (PSI)
- Issuer: Invesco
- Assets under management: $644.3 million
- Ten-year performance: 23.6%
- Expense ratio: 0.55%
PSI tracks the Dynamic Semiconductor Intellidex Index, which comprises 30 U.S.-traded semiconductor companies. The fund is rebalanced every quarter. The top three holdings of PSI are Nvidia, Broadcom, and Applied Materials Inc. (AMAT). The fund is more heavily weighted toward small-cap companies than the ETFs above.
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As of the date this article was written, the author does not own any of the above ETFs.
