Some three decades since their launch, exchange-traded funds (ETFs) have become the investment vehicle of choice. ETFs – which hold baskets of securities like mutual funds do but trade like stocks – caught on slowly at first, then at full steam.
"ETFs are becoming the way to invest," says Aniket Ullal, head of ETF data and analytics at CFRA Research. "This has been the story for a while, so that doesn't surprise me."
Investors have been drawn to the low cost, ease of trading and tax-efficiency that ETFs offer, but a wave of new exchange-traded products in recent years has also turned heads.
Many new ETFs employ complex strategies that are accessible to individual investors for the first time. "ETF innovation is alive and well," says Jay Jacobs, U.S. head of thematic and active ETFs at BlackRock.
Funds based on options strategies, for instance, continue to dominate the roster of new launches. A lot of them, called defined-outcome or buffered ETFs, use options to limit your losses in the stock market in exchange for giving up some potential gains.
But the biggest chunk of new money has been moving into spot bitcoin ETFs, which got the okay to launch in January 2024 from the U.S. Securities and Exchange Commission (SEC).
How we chose the best cheap ETFs to buy
We are mindful of these trends, but we're not chasing them. We are not considering a bitcoin ETF for this list of our favorite cheap ETFs, for instance. The Kip ETF 20 is designed to serve as a resource for investors who want to build a broadly diversified investment portfolio.
Our aim when choosing the best ETFs with low expense ratios is to provide ideas for strategies that can serve as the building blocks of a core portfolio, as well as a few selected tactical and thematic funds that can boost performance as part of a satellite portfolio.
Read on for more analysis of the best cheap ETFs to buy. These Kip ETF 20 picks allow investors to tackle various strategies at a low cost. All returns and data are through January 31 and the yields are 30-day SEC yields, unless otherwise noted.
- Kip ETF classification: Core stock fund
- Dividend yield: 1.2%
- Expense ratio: 0.03%
The iShares Core S&P 500 ETF (IVV) is as basic an investment as you can get. It tracks the ubiquitous S&P 500 index, which covers about 85% of the total stock market, for a low expense ratio of 0.03%.
Stocks in the fund – all of the S&P 500 constituents – are weighted by market value, or stock price times shares outstanding, so it should come as no surprise that the fund's top holdings are the mega-cap firms Nvidia (NVDA), Microsoft (MSFT), Apple (AAPL), Amazon.com (AMZN), Meta Platforms (META) and Alphabet (GOOGL).
- Kip ETF classification: Core stock fund
- Dividend yield: 1.4%
- Expense ratio: 0.05%
We like the combination of the iShares Core S&P Mid-Cap ETF (IJH) with its large-company counterpart, the iShares Core S&P 500, because there's no overlap in holdings.
The fund tracks the S&P MidCap 400 index. Index constituents are firms with market values that currently fall between $6.7 billion and $18 billion, covering about 8% of the total U.S. stock market. Examples include natural gas producer Expand Energy (EXE); ducts; financial services firm Interactive Brokers Group (IBKR); and home goods retailer Williams-Sonoma (WSM).
Mid-cap stocks rallied late last year, but have lagged in more recent months.
- Kip ETF classification: Core stock fund
- Dividend yield: 1.6%
- Expense ratio: 0.06%
The iShares Core S&P Small-Cap ETF (IJR) tracks the S&P SmallCap 600 index, which includes the smallest 6% of the total U.S. stock market – currently companies with market values between $1 billion and $6.7 billion. Top holdings include ATI (ATI) – formerly Allegheny Technologies – which supplies specialty materials for use in the aerospace and defense industries; air carrier Alaska Air Group (ALK); and Apple supplier Qorvo (QRVO).
This fund complements the iShares Core S&P suite of ETFs; there's no overlap in fund holdings. But we also favor its approach over other small-company indexes because it includes only profitable firms – earnings for the most recent quarter as well as the sum of earnings for the most recent four quarters must be positive – giving it a high-quality tilt.
That has helped performance in recent years. Over the past three, five- and 10-year periods, iShares Core S&P Small-Cap has outpaced the Russell 2000 benchmark of small-company stocks.
- Kip ETF classification: Core stock fund
- Dividend yield: 1.1%
- Expense ratio: 0.25%
A backlash against investing with environmental, social and corporate governance qualities in mind, or ESG investing, has escalated in recent years. But we are unmoved. The iShares MSCI USA ESG Select ETF (SUSA), which we consider ESG-lite, stays in the Kip ETF 20, our favorite cheap ETFs.
The 190-stock index it tracks avoids certain businesses, including those involved in firearms, nuclear weapons and tobacco. Top holdings include the usual large-cap fund names, such as Nvidia, Microsoft and Apple.
But the fund also holds some energy stocks, including ONEOK (OKE) and Targa Resources (TRGP). It even holds a few low-rated ESG firms, such as 3M (MMM), an industrial conglomerate that ESG data firm Sustainalytics rates as a "severe risk" when it comes to potential ESG trouble. (The ratings are designed to help investors identify ESG risks that could impact a firm's financial value.)
The ESG fund has lagged the broad market in recent years, but its five- and 10-year returns are in spitting distance of the S&P 500.
- Kip ETF classification: Core stock fund
- Dividend yield: 3.3%*
- Expense ratio: 0.05%
The Vanguard Total International Stock ETF (VXUS), which holds about 8,500 foreign stocks, is an easy way to add international exposure to a portfolio. As its name implies, the fund is all-encompassing and holds shares in companies from developed markets, such as the U.K. and Japan, as well as emerging ones, such as China and India.
Emerging market stocks make up more than a quarter of the fund's assets. U.S. investors have largely ignored international stocks for most of the past decade because they've lagged U.S. stocks, but in recent months, some markets have shown signs of life. Over the past 12 months, Vanguard Total International Stock gained 10.5%.
* This is a 12-month yield.
- Kip ETF classification: Dividend stock fund
- Dividend yield: 3.7%
- Expense ratio: 0.06%
Stocks that boast an above-average dividend yield are the objective in the Schwab U.S. Dividend Equity ETF (SCHD). But the algorithm that drives the stock picking at Schwab U.S. Dividend Equity favors consistent payers – those with at least 10 years of dividends – and firms with strong financials, such as a healthy return on equity (a profitability measure) and abundant free cash flow relative to total debt. (Free cash flow is the money left over after operating expenses and spending on assets.)
The fund's value tilt dampened returns over the past year, as seen in SCHD's single-digit return. But it currently yields 3.7%, more than double the yield of the S&P 500. And over the long haul, the fund has delivered solid results – 11.9% annualized over the past five years. AbbVie (ABBV), Amgen (AMGN) and Coca-Cola (KO) are top holdings.
- Kip ETF classification: Dividend stock fund
- Dividend yield: 1.7%
- Expense ratio: 0.05%
Don't confuse the Vanguard Dividend Appreciation ETF (VIG) with the Vanguard Dividend Growth Fund (VDIGX), the storied actively managed mutual fund. Although both funds target the best dividend stocks for dependable dividend growth, this cheap ETF is passively managed. It tracks an index that includes companies that have consistently boosted their payouts for at least 10 years in a row.
Top holdings in the fund are a blend of growth and value-oriented names, including Apple, Microsoft, JPMorgan Chase (JPM), Broadcom (AVGO) and Exxon Mobil (XOM). The fund's growth tilt has helped returns recently. Over the past 12 months, the Vanguard Dividend Appreciation is up 19.3%. The fund yields 1.7%.
- Kip ETF classification: Dividend stock fund
- Dividend yield: 2.5%
- Expense ratio: 0.15%
The iShares International Dividend Growth ETF (IGRO) boasts solid returns and low volatility over one, three and five years, as well as a 2.5% dividend yield and a low expense ratio of 0.15%.
IGRO favors companies that steadily increase their payouts. Firms that do so, the thinking goes, tend to be prudent about how they manage their business, too, which can lead to better results.
The fund tracks a Morningstar index that starts with foreign companies of all sizes in developed and emerging markets. Only firms with at least five years of uninterrupted dividend increases and a payout ratio (the percentage of a company’s earnings paid out as dividends) of less than 75% make the cut. A high payout ratio can be a sign of deteriorating earnings at the company, among other things.
Real estate investment trusts get the boot, as do the stocks with the highest dividend yields in each region (Asia Pacific, Europe, the Middle East or Africa, for example). A high dividend yield may be inflated, for example, by a stock price that is falling in step with the firm's financial woes.
The end result is a portfolio of almost 400 companies ranked by the value of the annual dividend. Top holdings include Spanish energy firm Iberdrola; Japanese financial services giant Mitsubishi UFJ Financial Group; Novartis (NVS), a Swiss drug company; and Royal Bank of Canada (RY).
- Kip ETF classification: Strategic stock funds
- Dividend yield: 1.6%
- Expense ratio: 0.09%
The Health Care Select Sector SPDR ETF (XLV) is one of the lowest-cost healthcare sector ETFs around, with a 0.09% annual expense ratio (far below the 0.40% of Invesco S&P 500 Equal Weight Health Care). And it holds 63 stocks. Heavyweights such as Eli Lilly (LLY), UnitedHealth Group (UNH), Johnson & Johnson (JNJ) and Merck (MRK) dominate its top holdings.
The fund's one-year return through January is 5%, which ranks among the top 20% of all healthcare-focused funds. Its 9.9% five-year annualized return is among the top of its peers.
- Kip ETF classification: Strategic stock funds
- Dividend yield: 2.4%
- Expense ratio: 0.09%
Investing in emerging market stocks has been a gloomy affair, but the sun is beginning to peek through the clouds, say many Wall Street analysts. China has been a drag on results, but Susan Gim, a portfolio manager at the investment firm Martin Currie, sees signs of recovery there, and growth in India promises a "great economic opportunity."
The iShares Core MSCI Emerging Markets (IEMG), which charges a low 0.09% expense ratio, holds stock in companies in dozens countries, including Brazil, China, India and Turkey. There's some momentum already: Over the past year months, the ETF has gained 12.8%.
- Kip ETF classification: Strategic stock fund
- Dividend yield: 1.3%
- Expense ratio: 0.12%
A focus on high-quality stocks has been spot-on over the past year. The JPMorgan U.S. Quality Factor ETF (JQUA) gained 22.8% over the past 12 months, among the best performers of the Kip ETF 20 for the period. That doesn't beat the broad market, up 26.4%, but U.S. Quality Factor was less volatile.
The fund sifts for companies that meet 10 quality criteria, including measures of profitability, financial risk and earnings quality. It holds 285 stocks, including Berkshire Hathaway (BRK.B), Meta Platforms and Visa (V).
- Kip ETF classification: Strategic stock fund
- Dividend yield: 0.6%
- Expense ratio: 0.20%
Thematic funds zero in on an emerging trend or a new invention so that investors can cash in with less risk. Instead of buying shares in one or two stocks that capture the trend, investors can spread their money among several companies. But while some funds zoom in on one theme – robotics, say – the S&P Kensho New Economies Composite ETF (KOMP) folds in multiple trends, from automation and artificial intelligence to cryptocurrency and energy-efficient technologies.
The diverse mishmash means that some trends the fund targets may soar while others take a breather. That helps explain the impressive 23.4%% gain in Kensho New Economies Composite over the past 12 months vs its three-year annualized return of 2.1%.
Its top holdings include defense companies Leidos Holdings (LDOS) and Elbit Systems (ESLT) and digital imaging firm Teledyne Technologies (TDY).
- Kip ETF classification: Strategic stock fund
- Dividend yield: 0.7%
- Expense ratio: 0.09%
The Technology Select Sector SPDR ETF (XLK) climbed 17.6%, impacted by a recent risk-off bias on Wall Street. Still, its annualized returns have outpaced the majority of its peers over the past three, five and 10 years.
The cheap ETF tracks a subset of the S&P 500 – the roughly 65 stocks considered information technology companies. Shares are weighted by market cap, from the biggest, Apple, at more than $3 trillion, to the solar stock Enphase Energy (ENPH), at just under $8 billion.
- Kip ETF classification: Strategic stock fund
- Dividend yield: 1.6%
- Expense ratio: 0.20%
Back in 2021, we added the Vanguard FTSE Europe (VGK) to the Kiplinger ETF 20 as a way to play the economic recovery over there. But more recently, the pace of economic growth in Europe has been ebbing. It's a good time to find a more tactical opportunity. So we're swapping Vanguard FTSE Europe for the Invesco S&P 500 Equal Weight ETF (RSP).
In an equal-weight fund, every company, small or large, gets an equal share of assets. That's a good thing these days. For starters, the even-steven approach tilts Invesco S&P 500 Equal Weight toward midsize-company stocks, which have been pulling ahead since the start of the year. This pocket of the stock market is often targeted for mergers and acquisitions, too, and those transactions are heating up.
But most important, equal weighting can offer some protection against a concentration in a few big companies. We're talking about the Magnificent Seven, of course – namely Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia and Tesla (TSLA).
Outsize gains in those stocks have fueled the bull market, but the mega-size firms now make up nearly 31% of the S&P 500 Index, which is weighted by market value. In the equal-weighted Invesco ETF, by contrast, the Mag 7 stocks combined make up less than 1.4% of assets. So when Nvidia shares plummeted 17% in a single day in January and the S&P 500 lost 1.5%, the Invesco fund was flat, with a 0.03% gain.
It's important to note that in recent years, equal weighting has been more of a hindrance than a help: Invesco S&P 500 Equal Weight returned 7.0% annualized over the past three years; the S&P 500, 11.9%.
And because the fund tilts toward smaller firms, it tends to be a tad more volatile than the broad-market benchmark. That said, a small stake in this cheap ETF could help mitigate any current concerns about sky-high stock market valuations or a Mag 7 overconcentration.
- Kip ETF 20 classification: Core bond fund
- SEC yield: 5.0%
- Expense ratio: 0.36%
The Fidelity Total Bond ETF (FBND) is a steady Eddie fund that has outpaced its peers in seven of the past nine calendar years (its first full year was 2015). It had below-average volatility, too.
It's an actively managed investment-grade bond fund, and it holds mostly medium-maturity U.S. government debt, corporate debt and government-backed mortgage bonds. But it has the leeway to boost returns by investing up to 20% of assets in lower-quality debt securities, including high-yield corporate IOUs, emerging-markets bonds and leveraged loans. These so-called "plus" sectors performed well in 2023, lifting the fund's returns.
Over the past 12 months, Fidelity Total Bond gained 3.1%, ahead of the 2.1% climb in the Bloomberg U.S. Aggregate Bond Index, a benchmark of high-quality U.S. debt. In recent months, the fund's managers have been cutting the fund's risk by reducing its exposure to corporate credit and shoring up its stake in Treasuries. The fund yields 5.0%.
- Kip ETF 20 classification: Core bond fund
- SEC yield: 4.7%
- Expense ratio: 0.10%
Target-maturity bond funds do what their name implies – that is, they hold a bunch of bonds with a similar maturity date. In the case of the Invesco BulletShares 2026 Corporate Bond ETF (BSCQ), that means 458 investment-grade (debt rated triple-A to triple-B) corporate securities, each maturing in 2026.
These types of funds are designed to help investors build a bond ladder, an investing strategy that involves assembling a portfolio of bonds with different maturity dates spaced out at regular intervals. As bonds mature, you re-invest the proceeds into new bonds with a longer maturity date – the furthest "rung" (or date) up the ladder.
Target-maturity bond funds are designed to be held to maturity. During the maturing year, the fund doesn't add to holdings. As bonds mature in the portfolio, the fund's portfolio transitions to cash and cash equivalents. Like a bond that matures, the fund will close and disburse the proceeds to shareholders at or near the end of its target year. We use it here in place of a short-term corporate bond fund. The fund yields 4.7%.
- Kip ETF 20 classification: Core bond fund
- SEC yield: 5.6%
- Expense ratio: 0.55%
One of the reasons that actively managed intermediate-term bond funds tend to outperform the Agg, the broad bond benchmark, is that they can boost returns by investing in sectors that aren't in the index.
The gurus at the SPDR DoubleLine Total Return Tactical ETF (TOTL) have favored non-traditional sectors, such as bank loans, emerging-markets debt and structured credit (such as collateralized loan or debt obligations).
The DoubleLine Total Return Tactical ETF has returned 3.9% over the past 12 months, ahead of most of its peers (intermediate-term core-plus bond funds). Over three years, the fund has notched above-average returns with below-average risk. It yields 5.6%.
- Kip ETF 20 classification: Strategic bond fund
- SEC yield: 4.6%
- Expense ratio: 0.25%
We jettisoned the BlackRock Ultra Short-Term Bond ETF (ICSH) for the actively managed BlackRock Short Duration Bond ETF (NEAR) with a higher duration, or sensitivity to interest rates.
We think the fund allows investors to cash in, still, on high short-term interest rates, but it better sets up investors for a boost in returns if rates move down (bond prices and interest rates move in opposite directions).
The fund holds 65% of its assets in bonds with maturities from one to seven years. It yields 5.1% and its duration of 1.9 years implies that if interest rates fall by one percentage point, the fund's net asset value will rise 1.9%. Over the past year, the fund gained 5.2%. Over the past three years, it has won solid marks for high returns and low risk relative to peers.
- Kip ETF 20 classification: Strategic bond fund
- SEC yield: 6.5%
- Expense ratio: 0.65%
In recent years, we wavered on whether to keep the Invesco Senior Loan ETF (BKLN) on this list of our favorite cheap ETFs. Senior loans (also known as bank loans) perform best when interest rates are rising – the coupon rate on these securities adjusts every few months in step with a short-term-bond benchmark – and analysts predicted cuts in 2024.
We kept the fund, thinking interest rates might stay higher for longer, and we were right. The Invesco Senior Loan has been the best ETF among bond funds in the Kip ETF 20 over the past 12 months, returning 8.9%. It wins on yield too, at 6.5%.
Even if rates fall – most expect a quarter-point cut this summer – senior loans tend to be lower in volatility and offer better risk-adjusted returns over the long haul relative to other bond sectors.
- Kip ETF 20 classification: Strategic bond fund
- Dividend yield: 3.6%
- Expense ratio: 0.02%
The municipal bond market has been volatile in recent years, thanks to uncertainty about inflation and interest rates. The Vanguard Tax-Exempt Bond ETF (VTEB) has struggled to keep pace with its peers.
It's an index fund, which means it should be about average for its peer group (funds that invest in medium-maturity municipal debt). But its 1.5% total return over the past 12 months ranks below average. We're watching this fund closely. It still beats on cost with a low, 0.02% annual expense ratio. And it has a super-low tracking error, which measures how closely the fund behaves relative to the index it mimics.
We have another fund in mind. It's actively managed, by a respected team. But it has a short track record, so it's too soon to recommend it. Stay tuned.
Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
