This post was inspired by Paul Merriman who has for many years recommended ETFs and mutual funds to implement his portfolio strategies. We have expanded on the “Best In Class” concept to include many more asset classes.
The first thing you should know is that there is rarely ONE best ETF or fund. It all depends on a host of variables:
- Your goals
- Your portfolio
- Your tax situation
- Your broker (some funds are commission-free).
- Subjective opinion about the data.
There are A LOT of really, really BAD ETFs and mutual funds out there. Make sure you avoid the worst by picking one of the ETFs below.
As of 2021 we now also track ESG funds. We also track the dividend yields and expense ratios for all funds.
To find out more about ESG investing check out our article ESG Investment Portfolios On Portfolio Einstein.
Best ETF and Mutual Fund for each asset class
Below you can see which ETFs and mutual funds that we recommend for each asset class.
|Asset Class||Mutual Fund||ETF||ESG ETF||ETF Yield||ETF Expense ratio||ESG ETF Yield||ESG ETF Expense ratio|
|Total US Market||VTSAX||VTI||ESGU||1.77%||0.03%||1.43%%||0.15%|
|Large Cap Value||VVIAX||VONV||VTV||2.69%||0.04%||2.69%||0.04%|
|Large Cap Blend (S&P 500)||VFIAX||VOO||ESGU||1.79%||0.04%||1.43%%||0.15%|
|Large Cap Growth||VIGAX||VUG||VUG||0.93%||0.04%||0.93%||0.04%|
|Mid Cap Value||VMVAX||VOE||IMCV||2.40%||0.30%||2.40%||0.30%|
|Mid Cap Blend||VIMAX||VO||IJH||1.59%||0.06%||1.59%||0.06%|
|Mid Cap Growth||VMGMX||VOT||IJK||1.06%||0.24%||1.06%||0.24%|
|Small Cap Value||VSIAX||VIOV||VIOV||1.57%||0.15%||1.57%||0.15%|
|Small Cap Blend||VSMAX||VIOO||ESML||1.34%||0.10%||1.25%||0.17%|
|Small Cap Growth||VSGAX||VBK||IJT||0.90%||0.25%||0.90%||0.25%|
|Real Estate - REIT||VGSLX||VNQ||VNQ||3.34%||0.12%||3.34%||0.12%|
|Total International Ex-US||VTIAX||VEU||VEU||3.03%||0.09%||3.03%||0.09%|
|Long Term Treasury||VLGSX||TLT||TLT||1.96%||0.15%||1.96%||0.15%|
|Intermediate Term Treasury||VSIGX||VGIT||VGIT||1.53%||0.05%||1.53%||0.05%|
|Short Term Treasury||VSBSX||VGSH||VGSH||1.49%||0.05%||1.49%||0.05%|
|Total Bond Market||VBTLX||BND||EAGG||2.13%||0.04%||1.69%||0.10%|
|Short Term Govt/Corp Bond||VBIRX||BSV||VCSH||2.04%||0.05%||2.04%||0.05%|
|T-bills/Treasury Money Market||VUSXX||BIL||BIL||1.38%||0.14%||1.38%||0.14%|
|Inter. Term Corporate Bond||VICSX||LQD||SUSC||2.71%||0.15%||2.40%||0.18%|
|Health Care Sector||VGHAX||XLV||XLV||1.58%||0.13%||1.58%||0.13%|
|Precious Metals Sector||FSAGX||GLTR||GLTR||0.00%||0.60%||0.00%||0.60%|
|Short Term Tax Exempt Munis||VWSUX||SUB||SUB||0.93%||0.07%||0.93%||0.07%|
|Inter. Term Tax Exempt Munis||VWIUX||VTEB||VTEB||1.52%||0.08%||1.52%||0.08%|
|Long Term Tax Exempt Munis||VWLUX||PZA||PZA||1.80%||0.28%||1.80%||0.28%|
|Short Term Investment Grade||VFSUX||VCSH||SUSB||2.04%||0.05%||1.81%||0.12%|
|High Yield Corporate Bonds||VWEAX||HYG||HYG||4.45%||0.49%||4.45%||0.49%|
|Treasury Inflation-Protected - TIPS||VAIPX||VTIP||VTIP||0.04%||0.06%||0.04%||0.06%|
|Total World Market||VTWAX||VT||VT||2.27%||0.09%||2.27%||0.09%|
|Minimum Volatility Factor||N/A||USMV||USMV||1.85%||0.15%||1.85%||0.15%|
|High Dividend Yield||VHYAX||VYM||VYM||3.29%||0.06%||3.29%||0.06%|
|International Small Value||N/A||DLS||DLS||3.32%||0.58%||3.32%||0.58%|
|Emerging Markets Small Blend||N/A||EWX||EWX||2.21%||0.65%||2.21%||0.65%|
|Emerging Markets Value||N/A||FNDE||FNDE||3.38%||0.39%||3.38%||0.39%|
|Two-Year Global Fixed-Income||N/A||BNDW||BNDW||1.87%||0.06%||1.87%||0.06%|
|Five-Year Global Fixed-Income||N/A||BNDW||BNDW||1.87%||0.06%||1.87%||0.06%|
|Emerging Market Bonds||VEMBX||VWOB||VWOB||4.22%||0.30%||4.22%||0.30%|
|Long Term Investment-grade Bonds||VWSEX||VCLT||VCLT||3.37%||0.05%||3.37%||0.05%|
|Long Term Treasury STRIPS||N/A||EDV||EDV||2.10%||0.07%||2.10%||0.07%|
|Inter. Term Govt/Corp Bond||VBILX||BIV||BIV||2.01%||0.07%||2.01%||0.07%|
The ETFs and Mutual funds have been selected by these criteria
- The funds must have a low tracking error. The fund must track its underlying index very closely or it is of no use.
- The funds must have low fees. Low expense ratios win the day and are one of the best indicators of performance.
- The funds must have a low bid/ask spread. This is relevant for ETFs that trade on the open market. If the gap (spread) of the buy and sell price is too great it imposes an additional cost to the investor. Therefore the lower the bid/ask spread, the better. The best indicator of a low spread is to see many shares being traded everyday.
- The fund must have high liquidity. This means how many shares of the fund are being traded every day. A good fund needs tens of thousands of shares traded every day.
- The holdings of the fund need to be tradeable. The holdings of the fund need to be liquid so that the fund can sell and buy the underlying assets that the strategy demands. We don’t want our funds to be forced sellers as that never ends well.
- The fund needs to have a low turnover rate. Every time a fund buys and sells the underlying stock it could be exposing itself to capital gain taxes. Those taxes are channeled to the investor, so you want as low turnover as possible.
Together these factors decide if the fund represents the appropriate asset class the best.
How to verify and do your own research
Morningstar.com is a great resource to research ETFs and mutual funds. If you want to research U.S. small-cap value ETFs you could look up VIOV, VBR, and SLYV (among others) on morningstar.com. Click the portfolio tab and you get an overview of what’s in the fund. Here are the 3 funds as of 2018:
VIOV: Vanguard S&P Small-Cap 600 Value Index Fund ETF Shares
VBR: Vanguard Small-Cap Value Index Fund ETF Shares
SLYV: SPDR® S&P 600 Small Cap Value ETF
As you can see VBR has some attributes that make it a poor candidate for representing the small-cap value asset class:
- It has style drifted. It has gone from a small-cap fund in 2017 to a mid-cap fund in 2018.
- The average size of the holdings are more than twice that of SLYV and VIOV.
I cheated a little and selected two funds, SLYV and VIOV, that both track the same index. They track the S&P Small-Cap 600 Value Index.
Next, you want to check:
- Fees (under fees & expenses), lower is better.
- Turnover rate (under fees & expenses), lower is better.
Super important note:
Notice that a return comparison doesn’t even factor in when we are comparing funds. If we follow the above guidelines we would select the best funds and therefore theoretically get the appropriate returns for that asset class. Sure some funds may beat other funds within the same category, but chasing performance is a loser’s game.
If you find that you have found two equally good funds and can’t decide on which one – BUY THEM BOTH. No need to agonize over which funds to select. The commissions on buying and selling is cheap and often free. It is a very small price to pay to avoid regret.
Summary and next steps
It is not easy finding the BEST ETF or mutual fund. But it is easy to AVOID the worst. By using a few simple metrics and Morningstar you can narrow down the field to just a few. While finding the best fund may be impossible, it is often to find one that is good enough.