Of the hundreds of ETFs Morningstar tracks, so-called core ETFs may have the best long-term prospects.
These funds - which offer broad, diversified exposure to a specific asset class - "typically have great track records," explains Michael Rawson, a Morningstar fund analyst. Additionally, they're often too big to fail, with assets well in excess of $1 billion. "The best use of ETFs for the average investor is as core portfolio building blocks," Rawson says.
Among the biggest core ETFs is iShares Core S&P 500 (IVV), which was up 10.9% in the first quarter and generated a three-year return of 12.56%. The iShares Core S&P Mid-Cap (IJH) is almost one-tenth the size, but came in with 13.43% return and a 14.95% three-year return - making it the second-best performer for the three-year period among the 20 largest ETFs.
PRICE IS RIGHT
Another core advantage: The price is right. All 10 iShares Core ETFs are offered commission-free at Fidelity; Schwab, which has come out with its own line of core funds, also boasts zero-cost online trade commissions.
Schwab also claims its ETF expenses are lower than its competitors; as an example, expenses for Schwab's U.S. Large-Cap fund (SCHX) come to 0.04%, as opposed to 0.07% for iShare's Core S&P Total U.S. Stock Market (ITOT). "Ideally, you want near zero cost for these funds," Rawson says.
After the core allocations are in place, Rawson says, investors can become more tactical, zeroing in on targeted niche markets to seize momentum opportunities. "Momentum [investing] is based on the premise that securities that have recently outperformed will continue to do so in the short run, and those that have underperformed will continue to lag," fellow Morningstar fund analyst Alex Bryan noted in an April 10 report.
In Morningstar's most recent ETF analysis, that positive momentum was weighted heavily behind home construction securities. Three of the top-performing U.S. ETF equity funds were home-building investments, led by iShares Dow Jones U.S. Home Construction (ITB), up 13.4% in the first quarter, and 63.38% for the past year.
GOLD A DRAG
Conversely, gold issues are now significantly lagging the market. Global X Gold Explorers (GLDX) was the worst-performing gold fund over the last year, down 41.35% for the full year and 24.9% in the first quarter. Not far behind was Global X Pure Gold Miners (GGGG), which dropped 30.62% for the past year and 20.17% year to date.
By another measure of momentum, flow, SPDR Gold Shares (GLD) was one of the biggest losers, with nearly $5 billion in withdrawals in the last three months alone. "Gold redemptions have been very high," Rawson says.
A wild-card momentum standout, Rawson says, is WisdomTree Japan Hedged Equity (DXJ), targeted at investors who want to participate in the Japanese equities market but don't want exposure to changes in the rate between the Japanese yen and the U.S. dollar.
Japanese Prime Minister Shinzo Abe has pushed to weaken the yen, which has made the Japanese stock market far more attractive - so much so that, since mid-November, the Tokyo Stock Price Index has shot up some 50% as of April 16, ending a multiyear slump. Meanwhile, the WisdomTree fund has grown from $522 million in assets at the end of last October to $6.86billion by mid-April.
Laton McCartney is a New York writer who's contributed to Money Management Executive and Information Management.