Navigating The Universe Of ETFs

Use the Kiplinger ETF 20 to build a solid core for your portfolio. Our list also includes funds to explore satellite strategies.

- Nellie S. Huang

Fly Me to the Moon is a love song, the Frank Sinatra version of which was actually played on the moon by Apollo 11 astronauts. But these days, it might as well be the anthem for investors in exchange-traded funds. Assets in ETFs are growing at an astronomical rate, closing in on $4 trillion in the U.S. That’s still less than the $18 trillion that sits in U.S. mutual funds. But it’s clear that investors are now choosing ETFs over mutual funds. The ETF share of total assets at investment firms has grown to nearly 16% from 8% at the start of the decade, while mutual funds have lost market share. // That’s in part because ETFs are agile. These funds, which are baskets of assets that trade like stocks, are typically index-based and, therefore, low-cost. They offer an efficient way to invest in a broad swath of the market or to zero in on a targeted area. As ETFs evolve, investors are getting smarter about how they use ETFs in their portfolios. “After a decade of market gains, ETFs now play a unique role for investors as the foundation of a portfolio and also as vehicles that enable investors to be nimble,” says Kari Droller, who oversees third-party mutual funds and ETFs at Charles Schwab. // According to a recent vestors are using ETFs to fortify the core of their portfolios. But they’re also using these funds to build satellite holdings that revolve around the core. These bets are more strategic: Short term bond ETFs offer ballast in an uncertain interest rate environment; dividend-stock funds provide income and stability; a health care stock ETF can goose growth.