what are good etfs to invest in?
Hey teenagetraders! If you're just getting into investing, you’ve probably heard a lot about ETFs, or Exchange-Traded Funds. They’re a super popular way to invest in a wide range of assets without picking individual stocks. But with so many options out there, how do you choose the best ones? Let's dive into what makes an ETF great by comparing dividends, year-over-year (YoY) returns, and expense ratios.
1. What is an ETF?
Before we get into the comparisons, let's quickly cover what an ETF is. An ETF is like a basket of investments, such as stocks or bonds, that you can buy and sell on an exchange just like a stock. It’s a way to invest in a variety of companies or assets without having to pick them individually.
2. Key Factors to Compare in ETFs
Dividends
What Are Dividends?: Dividends are payments made by companies to shareholders out of their profits. Some ETFs invest in companies that regularly pay dividends, which means you can earn money not just from the ETF’s price going up, but also from these regular payments.
Why It Matters: For long-term investors, dividend-paying ETFs can be attractive because they provide a steady income stream in addition to potential capital gains.
Year-Over-Year (YoY) Return
What is YoY Return?: Year-over-Year (YoY) return is a measure of how much an investment has grown (or shrunk) over the past year. It's calculated by comparing the value of the investment today to its value exactly one year ago.
Why It Matters: YoY return gives you a snapshot of how well an ETF is performing. A high YoY return can be a sign that the ETF is invested in a sector that’s doing well, but it’s important to consider whether that growth is sustainable.
Expense Ratio
What is the Expense Ratio?: The expense ratio is the annual fee that an ETF charges its investors. It’s expressed as a percentage of the total assets you have invested in the ETF.
Why It Matters: Lower expense ratios mean more of your money stays invested, while higher ratios eat into your returns over time. When comparing ETFs, the expense ratio is a crucial factor, especially for long-term investments.
3. Comparing Some of the Best ETFs
Let’s take a look at some popular ETFs by comparing their dividends, YoY returns, and expense ratios.
ETF Name — Dividend Yield — YoY Return (2022) — Expense Ratio
Vanguard High Dividend Yield ETF (VYM): 3.10%, -0.58%, 0.06%
SPDR S&P 500 ETF (SPY): 1.57%, -18.11%, 0.09%
Invesco QQQ ETF (QQQ): 0.70%, -33.04%, 0.20%
iShares Core S&P 500 ETF (IVV): 1.55%, -18.17%, 0.03%
While these dividend numbers may seem small, and the year over year return may be shockingly negative, these etfs have proved to give long term returns of ~8-10% each year, and these small dividends when reinvested add to the compound interest discussed in previous blog posts.
Vanguard High Dividend Yield ETF (VYM)
Dividend Yield: This ETF has a high dividend yield of 3.10%, making it attractive for income-focused investors.
YoY Return: It had a slight dip in 2022 (-0.58%), but this is much better compared to broader market declines.
Expense Ratio: It’s very low at 0.06%, so most of your money stays invested.
SPDR S&P 500 ETF (SPY)
Dividend Yield: A more modest dividend yield at 1.57%.
YoY Return: It reflects the overall market decline in 2022 (-18.11%).
Expense Ratio: At 0.09%, it’s low but slightly higher than some other S&P 500 ETFs.
Invesco QQQ ETF (QQQ)
Dividend Yield: Very low at 0.70%, as it focuses more on growth stocks like tech companies.
YoY Return: It had a tough year in 2022 (-33.04%), but it’s historically known for high growth in good years.
Expense Ratio: Higher at 0.20%, but that’s because it targets more volatile growth stocks.
iShares Core S&P 500 ETF (IVV)
Dividend Yield: Similar to SPY with a yield of 1.55%.
YoY Return: Nearly identical to SPY (-18.17%).
Expense Ratio: Extremely low at 0.03%, making it a cost-effective choice for tracking the S&P 500.
4. Understanding Which ETF Might Be Right for You
For Income: If you’re looking for steady income through dividends, VYM might be your go-to ETF due to its high dividend yield.
For Long-Term Growth: If you’re more focused on long-term growth and can handle some ups and downs, ETFs like QQQ, despite its rough 2022, may be appealing due to its tech-heavy portfolio.
For Low Costs: If minimizing costs is your priority, IVV is a standout with its ultra-low expense ratio.
Final Thoughts
Choosing the right ETF involves balancing your goals—whether it’s income through dividends, growth potential, or minimizing costs. By understanding key factors like dividend yield, YoY return, and expense ratios, you can make informed decisions that align with your investment strategy.
Keep learning and exploring, Your teenagetraders Team 💹📈
