Let’s start with the core of any ETF portfolio for a U.S.-based investor: U.S. equities.
But what’s the choice for the next, say, six months?
In 2017 the major indexes have taken turns leading the pack. One quarter it’s the turn of the small caps in the Russell 2000. The next quarter it’s the tech giants of the NASDAQ 100 at the top of the performance charts. And the Standard & Poor’s 500 has set record after record.
The decision is especially hard because all these indexes are trading near record highs in a bull market that is definitely long in the tooth. (Although the length of a bull’s teeth isn’t a signal that a market is about to fall.)
Looking backward at 2017 so far, the edge goes to the NASDAQ 100. The PowerShares QQ ETF (QQQ) is the favorite with a return of 22.8% year to date through October 2. The iSharees Core S&P 500 (IVV) earned a return of 12.91% for 2017 to date. The iShares Russell 2000 ETF (IWM) trails the pack, just slightly, at 11.32%.
But unless you have a time machine (and mine’s in the shop for repairs), the past performance of these three potential core U.S. ETFs isn’t very useful.
Looking forward is never as easy as looking backward, but for the next six months I’d give the edge to the S&P 500 as my index for this slot.
Why? Two important tail winds blow slightly stronger for the S&P than for either the NASDAQ 100 or the Russell 2000.
First, the dollar has been weak against the currencies of our trading partners and that works to the benefits of U.S. exporters since their customers see cheaper prices in their currencies for U.S. products. There are simply more big exporting companies in the S&P 500 than in either index. (More by a wide margin than in the small company Russell 2000 and more by a smaller margin than in the NASDAQ 100.)
Second, the cuts in the corporate tax rate proposed by the Trump administration and the Republican leadership in Congress work more to the advantage of the big S&P companies than to the technology heavy NASDAQ. (The numbers say that technology companies are already pretty good at paying a low effective tax rate.) And proposals for some kind of tax holiday for companies that repatriate earnings from overseas works more to the benefit of big multinationals than to that of smaller companies with a larger percentage of U.S. sales.
When it comes down to picking a specific S&P 500 ETF, I say look for the lowest cost at an ETF that is big enough to provide good liquidity in any market upheaval. To me that gives a slight edge to the iShares Core S&P 500 ETF (IVV) over the SPDR S&P 500 ETF (SPY). The expense ratio of the IVV is lower at 4 basis points versus 7 for the SPY. And while the SPY has a heftier market cap at $246 billion, the $125 billion at IVV is big enough. (That said, if you already own SPY, I wouldn’t rush to sell and then buy IVV. The difference in expenses won’t be enough to make up for the taxes you might have to pay if you’re holding the ETF in a taxable account) on the sale.)
Anyway that’s my first pick for my Perfect 5 ETF Active Passive Portfolio: iShares Core S&P 500 ETF (IVV.)
I will fill the next two slots in this portfolio on this site so you can read them for free.
The last two won’t be posted on my free JubakPicks.com site. To read those ETF picks you’ve got several choices.
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