One of the easiest and best ways to diversify your investment portfolio is to buy exchange-traded funds. The popularity of ETF investing has exploded in recent decades. ETFs are an excellent way to gain passive, diversified exposure to a particular market index, a particular market sector or a particular investing theme. There are more than 4,000 ETFs on the market today with combined assets under management (AUM) worth more than $5 trillion. However, not all ETFs are created equal. Here are seven of Morningstar's "five-star" ETFs with plenty of liquidity, low fees and long-term upside.
Invesco QQQ ETF
The QQQ is a popular ETF that has the Nasdaq 100 index (.NQX) as its benchmark. The Nasdaq 100 is an index of the 100 largest non-financial companies listed on the Nasdaq composite (.IXIC). The QQQ's top holdings include Amazon.com (AMZN) Microsoft Corp. (MSFT) and Apple (AAPL), which collectively account for about 30 percent of the fund's holdings. The fund's expense ratio, the fee the fund charges for management, is only 0.2 percent, or $20 annually per $10,000 invested. The QQQ has $67.9 billion in AUM and provides investors diversified exposure to large-cap U.S. growth stocks.
Energy Select Sector SPDR Fund
The XLE holds stocks that are included in the S&P 500's (.SPX) energy sector and has high exposure to some of the largest U.S. oil and gas companies. Top holdings include Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX), which together account for about 40 percent of the fund's assets. The rest of the fund's $13.2 billion in assets is devoted to 28 other energy stocks. The XLE has an expense ratio of 0.13 percent and it has an attractive 3.1 percent dividend yield.
Consumer Discretionary Select Sector SPDR Fund
Another S&P 500 sector ETF that is at the top of Morningstar's list of ETFs to buy is the XLY. The consumer discretionary sector includes cyclical stocks that benefit when consumers have high levels of disposable income. With the economy booming, many of these companies have thrived in recent years. Top XLY ETF holdings include Amazon, Home Depot (HD) and McDonald's Corp. (MCD), which account for nearly 40 percent of the fund's holdings. The XLY ETF has $12.1 billion in AUM and an expense ratio of 0.13 percent.
VanEck Vectors Semiconductor ETF
Rather than diversifying across a broad index or a market sector, the SMH targets 26 of the largest U.S.-listed companies that produce the semiconductors used in digital devices ranging from iPhones to driverless vehicles to cloud servers. Individual semiconductor stocks are often extremely volatile and unpredictable. Diversifying across the whole group provides safety for investors, especially in an industry where the technology is changing so rapidly. The fund's top holdings include Intel Corp. (INTC), Taiwan Semiconductor Manufacturing (TSM) and Texas Instruments (TXN). The $845 million fund has a 0.35 percent expense ratio.
iShares MSCI Hong Kong ETF
The EWH holds stocks listed primarily on the Stock Exchange of Hong Kong Limited. This ETF provides U.S. investors with access to companies from China, Taiwan and Hong Kong, most of which do not have U.S. listings. Top holdings include AIA Group (AAGIY), Hong Kong Exchanges and Clearing and CK Hutchison Holdings. Most of the fund's 47 holdings are large and mega-cap companies, but even extremely large companies can put up impressive growth numbers in these emerging markets. The EWH fund has $2.6 billion in assets under management and a 0.48 percent expense ratio.
iShares Core S&P Small-Cap ETF
Most of the most popular ETFs are geared toward large-cap companies, but the IJR tracks the S&P Small-Cap 600 index (.SML), which includes companies with market caps under $2 billion. The IJR fund holds 600 stocks and the extreme diversification helps reduce the risk typically associated with owning smaller stocks. Top holdings include First Financial Bancshares (FFIN), Trex Co. (TREX) and Spire (SR), but each stock has less than a 0.6 percent overall weighting. The IJR ETF has $42.3 billion in AUM and a miniscule 0.07 expense ratio.
Vanguard S&P 500 ETF
If investors are going to buy just one ETF from this list, the VOO is probably the best choice. The VOO is a cousin of the SPDR S&P 500 ETF Trust (SPY), the most popular ETF in the world. Both ETFs are designed to track the S&P 500 index. Both ETFs are solid options, but the VOO ETF has the slight edge in terms of fees. The VOO has $99.8 billion in AUM and an expense ratio of just 0.04 percent, one of the lowest on the market.