Beginning investors often struggle to pick the right investments to start investing. With thousands of options, sorting through all the investment options available can be worse than going through The Cheesecake Factory menu. In investing, the best approach is usually to go broad by choosing an investment that holds a little bit of a lot of things, which may or may not work for cheesecake. Exchange-traded funds (ETFs) and mutual funds make it possible for new investors to build diversified portfolios at a low cost. The following funds have been recommended by experts as good picks for beginning investors. You don’t need to own them all; just choose one to three in different market areas to build your portfolio.
iShares S&P 500 Value ETF
At Chaikin Analytics and PortfolioWise, they recommend beginning investors use “broad-based ETFs that give diversified exposure to a variety of stocks,” says Carlton Neel, CEO of Chaikin Analytics. Given that “value stocks have begun to outperform growth stocks for the first time in over a decade,” he says value funds like IVE (IVE) can be a good play. Bullishly rated in the Chaikin Power Gauge ETF model, IVE “has a very nice 2.1% dividend yield per year and carries a relatively low expense ratio at 18 basis points (0.18%),” he says. “With nearly $19 billion in assets and lots of daily liquidity, it is easy to trade and with most brokerage platforms going to zero commissions, it would be cheap for a beginner to enter and hold as a long-term investment.”
Schwab U.S. Large-Cap Value ETF
Neel and Chaikin also like SCHV (SCHV) for beginning investors. The fund “carries nearly twice as many highly ranked stocks in our system as lower-rated stocks,” Neel says. “With its nearly nonexistent expense of a paltry 4 basis points (0.04%), it costs the investor nearly nothing to hold, and with the zero commissions … it could be a very economical choice.” He adds that its 3% dividend yield and strong liquidity can add to its potential as a great investment for beginners. SCHV is also ranked the eighth best large value fund by U.S. News & World Report.
SPDR S&P 600 Small Cap Value ETF
SLYV (SLYV) is in “the current sweet spot of both being tilted toward value stocks and small-cap stocks,” Neel says. “Quite possibly, we are in the early stages of both small and value outperforming, given the last decade of the opposite occurring.” He says to follow the advice of Wayne Gretzky and “skate to where the puck is going, not where it is.” With its strong momentum and “having significantly outperformed the S&P 500 in the last six months,” SLYV could be “where the puck is going,” Neel says. It also has a low expense ratio of 0.15% and lots of liquidity, making it inexpensive and easy to get into and out of. U.S. News & World Report ranks SLYV the sixth best small value fund.
First Trust Small Cap Value AlphaDEX ETF
Unlike the majority of index funds, FYT (FYT) is equal-weighted. That means each of its holdings are given equal weight, rather than the more popular market-cap weighting that holds more of bigger companies. “Given the recent outperformance of small caps versus large caps, the equal-weighting aspect could boost returns further,” Neel says. “Although the expense ratio is higher for an ETF at 72 basis points (0.72%), it is the best-performing small-cap ETF of the last six months, so it has very positive momentum behind it.” He says that their PortfolioWise ranking system “finds the fund very compelling,” with a ratio of bullish stocks to bearish stocks of nearly 8-to-1.
Vanguard Total Stock Market ETF
Scott Pederson, wealth manager and owner of Harmony Wealth Management, also likes ETFs for beginning investors, but he takes a bit broader view, such as VTI (VTI). The fund gives investors exposure to U.S. stocks of all sizes and is among the most popular funds for investors looking for broad-market exposure from a single fund. It also has a very low expense ratio of 0.03% and is quite tax-efficient, Pederson says, noting that it hasn’t distributed any capital gains since its inception in 2001.
Vanguard Total International Stock ETF
For international exposure, which all investors should have, there's the Vanguard Total International Stock ETF. Pederson likes VXUS (VXUS) because it gives investors exposure to “stocks of all sizes from foreign developed and emerging markets.” With investments in more than 40 countries, it covers 98% of the investable foreign realm. Being passively managed (it follows the FTSE Global All Cap ex-US Index), this ETF also comes with a low expense ratio of only 0.09%. Pederson points out that this one, too, is quite tax-efficient.
Vanguard Total Bond Market ETF
Pederson points beginning investors looking for bond exposure to Vanguard’s Total Bond Market ETF (BND). The “total bond market” referred to here is the total U.S.-dollar-denominated investment-grade market. “The portfolio favors high-quality government Treasurys and agency mortgage-backed securities, which jointly account for around two-thirds of the portfolio,” Pederson says. It also has a very low expense ratio of 0.035%. U.S. News & World Report ranks BND the eighth best intermediate core bond fund.
Target-date retirement funds
Beginning investors can build their own diversified portfolio from the aforementioned ETFs, or you can use a one-stop-shop like target-date retirement funds. The general rule of thumb with investing is to invest more aggressively for growth when you are far from your goal and gradually become more conservative as you near it. This is exactly what target-date retirement funds do. They “move more of your dollars into safer vehicles, like bonds, to protect your liquidity when you need it most,” says Chase Lawson, a personal finance expert and author of “Financial Freedom: Breaking the Chains to Independence and Creating Massive Wealth.” He likes Vanguard’s target retirement funds for their low fees – all are around 0.15% expense ratio – and performance.
Asset allocation funds
Another one-stop-shop fund option for beginning investors. Asset allocation funds are similar to target-date funds in that they hold a mix of stocks and bonds, but unlike target-dates, asset allocation funds never change their allocation. An 80/20 asset allocation fund will continue to hold 80% stocks into perpetuity. If you know the allocation you want and are willing to switch to a different fund as your allocation needs change, asset allocation funds can be a good place to start investing. U.S. News & World Report ranks asset allocation funds of varying stock-bond mixes.
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