The Ideal US Equity ETF Portfolio
4 ETFs for passive investing
I come across all sorts of ETFs recommendations, in all sorts of places and I've always wanted to compare Total Returns these ETFs have delivered over the last 10 years. The goal is to try and figure out which ETFs have the probability of delivering the highest returns going forward and what an ideal US equity ETF portfolio would look like.
I’ll also share what a risk inverse investor may consider as well as which ETF I would buy if I could pick only one.
In this article:
We are going to compare the 1 year, 3 year, 5 year and 10 year Total Returns with a bias towards longer term returns
Analyse dividends & dividend growth - Please take into consideration, Dividend is already included in Total Returns, so this is just to understand the income profile of these ETFs
We will take a peek at what kind of stocks are in these ETFs - Not the actual holdings but what’s the logic these ETFs follow, as the holdings may change
Finally we’ll look at a fund overlap analysis to understand how broad our coverage really is with this portfolio
We will pick ETFs in the following categories:
Dividend
Growth
Broad Market Exposure
Special Mention
Contenders:
I started my analysis by identifying the most common ETFs that I come across in the context of long term passive investing for US Equities:
I added two ETFs that I think deliver superior returns to the mix:
Did I miss anything? Comment them in and I will do an analysis including those too.
Data
Seeking Alpha Link to follow along (Remember to change the metric to “Total Return” - Doesn’t default to it)
Last 10 year Total Returns:
Source: Seeking Alpha
Date: March 28, 2022
Dividend Profile:
Source: Seeking Alpha
Date: March 28, 2022
Dividend Pick:
Contender: VYM 0.00%↑ , VIG 0.00%↑ , SCHD 0.00%↑
Winner: SCHD 0.00%↑
The fund’s goal is to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Dividend 100™ Index
Fund Highlights:
A straightforward, low-cost fund offering potential tax-efficiency
The Fund can serve as part of the core or complement in a diversified portfolio
Tracks an index focused on the quality and sustainability of dividends
Invests in stocks selected for fundamental strength relative to their peers, based on financial ratios
Insights:
Performed better than $VYM and $VIG in every period, except the last 1 year
2nd highest total returns in last 3 years
Highest 4 Year average dividend yield amongst all ETFs considered - 3.12% (TTM: 3.71%)
Highest 3 Year dividend growth (CAGR) amongst all ETFs considered - 13.33% (tied with $SPGP)
2nd highest 5 Year dividend growth (CAGR) amongst all ETFs considered (SPGP at 26.52% vs SCHD at 15.56%)
2nd highest consecutive years of dividend growth - 10 Years ($VYM is at 12 years)
Expense Ratio: 0.06%
Growth Pick:
Contender: VUG 0.00%↑ , SPGP 0.00%↑ , QQQ 0.00%↑ , VGT 0.00%↑ & XLK 0.00%↑
Winner: XLK 0.00%↑
The Technology Select Sector SPDR® Fund seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Technology Select Sector Index (the “Index”)
Fund Highlights:
The Index seeks to provide an effective representation of the technology sector of the S&P 500 Index
Seeks to provide precise exposure to companies from technology hardware, storage, and peripherals; software; communications equipment; semiconductors and semiconductor equipment; IT services; and electronic equipment, instruments and components.
Insights:
Highest returns across all time periods, except in the last 10 years (Close 2nd in last 10 years)
Held up really well in the last 1 and 3 years, during the market turmoil. Almost as good as $SPGP which has a much higher expense ratio.
Close 2nd highest dividend payer amongst the growth cohort
Expense Ratio: 0.10%
Broad Market Pick:
Contender: VOO 0.00%↑ , VTI 0.00%↑
Winner: VOO 0.00%↑
Invests in stocks in the S&P 500 Index, representing 500 of the largest U.S. companies
Fund Highlights:
Goal is to closely track the index’s return, which is considered a gauge of overall U.S. stock returns.
Offers high potential for investment growth; share value rises and falls more sharply than that of funds holding bonds.
More appropriate for long-term goals where your money’s growth is essential.
Insights:
$VOO outperforms $VTI in every time frame measured
Dividend yield and growth at par with $VTI - 4 Year Average $VOO yield is 1.65% vs 1.58% for $VTI
Broad Market Coverage - S&P 500 companies are arguably the best 500 companies in the country, so you want to hold that basket and not pay a bomb doing it.
Extremely low cost
Expense Ratio: 0.03%
Special Mention:
SPGP 0.00%↑ : Growth at a reasonable price
The Invesco S&P 500 GARP ETF (Fund) is based on the S&P 500 Growth at a Reasonable Price Index (Index).
Fund Highlights:
Invest at least 90% of its total assets in the component securities that comprise the Index
Composed of approximately 75 securities in the S&P 500® Index that have been identified as having the highest “growth scores” and “quality and value composite scores,” calculated pursuant to the index methodology.
The Index constituents are weighted based on their growth scores.
The Fund and the Index are rebalanced and reconstituted semi-annually.
Insights:
GARP (Growth at Reasonable Price) by definition, makes it a more balanced pick learning towards higher & stable return
Performance holds up across all time horizons, and didn't dip as much in a tough market (last 3 years)
Highest total return in last 3 year, 2nd highest in last 5 years
Pays dividend which is growing at 13.33% in last 3 years CAGR (Highest tied with $SCHD) and 26.52% in 5 year CAGR (Highest, 2nd best is $SCHD at 15.56%)
Given the current market uncertainty, you may wanna add this to your portfolio to give it a little more support in a volatile market, without sacrificing growth
Expense Ratio: 0.33%
Fund overlap analysis:
Low overlap in all fund except $VOO:
$SCHD <> $XLK
3 overlapping holdings
3.0% of $SCHD's 105 holdings also in $XLK
4.5% of $XLK's 66 holdings also in $SCHD
$SCHD <> $SPGP
7 overlapping holdings
7.0% of $SCHD's 105 holdings also in $SPGP
9.7% of $SPGP's 72 holdings also in $SCHD
$XLK <> $SPGP
12 overlapping holdings
18.2% of $XLK's 66 holdings also in $SPGP
16.7%of $SPGP's 72 holdings also in $XLK
High Overlap with $VOO, which is expected, given $VOO is a broad strategy and covers all of S&P500
$SCHD <> $VOO
54 overlapping holdings
54.0% of SCHD's 105 holdings also in VOO
10.7% of VOO's 510 holdings also in SCHD
$XLK <> $VOO
65 overlapping holdings
98.5% of XLK's 66 holdings also in VOO
12.9% of VOO's 510 holdings also in XLK
$SPGP <> $VOO
72 overlapping holdings
100.0% of SPGP's 72 holdings also in VOO
14.3% of VOO's 510 holdings also in SPGP
The overlap analysis shows us that there is very little overlap between $SCHD, $XLK & $SPGP. When building portfolios, I try to find ETFs that have low correlation to each other. $VOO has a high overlap with all the other 3 ETFs but that is by design given $VOO covers all of S&P500.
Summary:
In summary, based on my analysis, the ideal ETFs to get exposure to US Equities consists of 3/4 ETFs and I would have equal exposure in each of them.
Dividend: SCHD 0.00%↑
Growth: XLK 0.00%↑
Broad Market Exposure: VOO 0.00%↑
Special Mention for the current climate - Growth at Reasonable Price: SPGP 0.00%↑
Risk averse investors, should consider $SPGP, instead of $XLK in their portfolios
If I could only hold one, I’d pick $SCHD. It has balanced returns across all time periods when compared to stocks in the middle of the pack.
Delivers good enough returns in good times
Does not tank as much in bad times
By far the best Dividend payer and Dividends hits different. I like how dollar cost averaging is built into a dividend stock by default (as long as you are reinvesting your dividends, which you should).
I am a huge fan of Dollar Cost Averaging as a strategy. I “discovered” dollar cost averaging because of Tesla but that’s a story for another day. Subscribe to keep up.
Keep Dollar Cost Averaging!
Past performance is no guarantee of future results.
The ideas discussed in this article should not be constituted as investment advice.
Disclosure: We own positions in some/all of the tickers mentioned in this article.