Index funds, especially index ETFs, are a low-cost, tax-efficient way to invest a client’s money. Index ETFs can be useful in implementing the appropriate asset allocation strategy for your clients. Here are some thoughts on picking top index ETFs for 2022.
Choosing the Best Index ETFs
While there is no one right metric to choose the best ETFs, these criteria can help narrow your search.
The Morningstar medalist ratings can be a quick, useful tool. In the spirit of the Olympics, they rate top ETFs as gold, silver or bronze, plus neutral and negative ratings for average and subpar funds. The medalist rankings take five factors into account:
- Process: How are the ETF’s assets put to work?
- Performance: What are its risk-adjusted returns over time?
- People: Who manages the fund?
- Parent: What company is offering the ETF?
- Price: Does the fund offer a solid value proposition?
Expenses are another key metric to consider, especially with an index ETF. In this case, less is more.
Which Index Does the ETF Track?
It’s important that the ETF uses an index that is representative of its asset class and investment objective. This is important for asset allocation purposes and other reasons.
The fund’s level of assets under management is also a consideration. Not only do the best index ETFs tend to attract assets, but a larger asset base can also help to reduce the size of any bid/ask spread.
Let’s look at some of the top index ETFs offered by the biggest ETF providers. Please note that none of this should be construed as investment advice, but rather as some metrics that might be useful to you in screening and choosing index ETFs for your clients.
Return data is per Morningstar as of Jan. 31. The Total Stock Market ETFs are part of the large-cap blend category.