Eric Dutram: Exchange traded funds have become very popular over the past few years. The fast growing business of ETFs have the made the space all the more competitive among issuers fighting in the segment. While the battle for AUM has been especially intense, the war for trades among brokers has been a big fight as well.
That is because these ETF trades represent a new and potentially lucrative market for many online brokerage houses, and one that could be a catalyst for growth in the coming months and years among the companies in this space.
While having robust platforms and low fees are one way to attract investors, many others have sought to offer up commission-free ETF trading on select funds as well. This method looks to generate interest from long-term investors and those in the increasingly important IRA market by giving investors an easy and cheap way to dollar-cost average into their favorite ETF segments (See theComplete Guide to Preferred Stock ETF Investing).
Notable programs in this field include ones from major brokers such TD Ameritrade, Charles Schwab, Vanguard, Interactive Brokers, and Fidelity. While each have their own merits, arguably TD Ameritrade offers one of the largest and most complete lineups of commission-free ETFs.
The company has over 100 products that trade commission-free, although it should be noted that if you trade within the 30-day holding period you will incur a fee. Still, their lineup includes a wide array of funds from issuers such as iShares, PowerShares, State Street, Vanguard, WisdomTree, iPath, and Van Eck.
The 101 ETFs are divided into 32 bond funds, 31 domestic equity ETFs, 3 sector funds, 31 international funds and four commodity products, suggesting that a pretty well diversified portfolio can be made with solely commission-free funds.
While this is an impressive lineup, it could be overwhelming to some investors. For this reason, we have highlighted below five of our favorite ETFs from this list of 100+ funds that could be great picks for long-term Ameritrade investors seeking to dollar cost average in– commission-free– to some quality ETFs:
Vanguard MSCI Emerging Markets ETF (NYSEARCA:VWO)
As domestic markets and European economies continue to sputter, growth in equities becomes harder to come by. In this light, a look at the quickly growing emerging markets could be ideal for some investors who have a higher risk tolerance at this time. These nations not only have greater growth potential but also lower correlation with their developed market counterparts (Three Overlooked Emerging Market ETFs)
Investors who are willing to take higher risks in the hope of achieving greater growth rates can invest in the low cost Vanguard MSCI Emerging Markets ETF.
This ETF tracks the MSCI Emerging Markets Index in order to provide exposure to a basket of stocks across various developing nations. The product has proven to be extremely popular with investors.
The proof is in the $67.7 billion under management in the fund, while trading volume is close to 18,569,500. Also, the cost appears to be minimal at 20 basis points, especially when compared to other emerging market ETFs.
In terms of a portfolio, VWO provides access to 903 securities in its basket and does not allocate more than 3.8% to any one stock. This suggests that the product is well diversified from an individual security perspective and is unlikely to face company specific risk (read Three Emerging Market ETFs to Limit BRIC Exposure).
With regard to country exposure, China takes the top spot at 18.2% of assets, followed by 15.4% in Korea, 14% in Brazil, and a 10.6% allocation to Taiwan.
Vanguard Dividend Appreciation ETF (NYSEARCA:VIG)
On account of risks in the market and extreme stock volatility over the past few years, many investors have sought greater stability in their portfolios along with high levels of current income. Unfortunately, bond yields have been quite low pushing many into high dividend paying stocks instead. (Ten Biggest U.S. Equity Market ETFs)
Beyond individual securities, investments in equity ETFs comprised of stocks that pay high dividend yields emerged as a source of decent investor income for investors at this time. This has proven to be a pretty good strategy, as intermediate term bonds are still yielding below broad stock markets and equities have risen higher this far in 2012.
For a dividend-focused approach for the long-term investor in the ETF space, a closer look at VIG could be warranted. The fund tracks the Dividend Achievers Select Index which looks to focus on U.S. common stocks that have a history of increased dividend payments for at least ten consecutive years.
This gives the fund a solid dividend yield of roughly 2.30% a year, a good level considering the focus of the fund. Investors should also note that over $13.4 billion is under management in the fund and that both expenses are reasonable (0.13%) and volume is high (671,100 shares per day).
The product holds a basket of 134 dividend paying stocks. The large cap constituents of the top 10 holdings have a share of 38.0% in net asset. Among these, The Coca-Cola Company (NYSE:KO), International Business Machines (NYSE:IBM) and Pepsico Inc.(NYSE:PEP) take the top three spots. In terms of sectors, this dividend ETF is tilted towards Consumer Staples (23.4%), Industrials (22.4%), and Consumer Discretionary (15.3%).
Vanguard Small-Cap ETF (NYSEARCA:VB)
While constructing a portfolio, investors should consider the small-cap segment as an equity component. In recent years, the small-cap segment has seen a ramp up in demand attributable to its promising long-term growth potential.
This slice of the market has the capability to improve the risk adjusted returns of the portfolio and reward investors with steady gains in the long term. The risk attribute of the asset class holds out a promise of unparalleled returns in comparison to its large-cap counterparts.
However, one trait that goes against it is the volatility. Small-cap stocks are more volatile in nature than the blue chip counterparts and thus can be more negatively impacted when markets are slumping.
Investors seeking to play this corner of the market can invest in Vanguard Small-Cap ETF. This ETF provides exposure to a diversified group of 1,735 small-cap stocks at a minimal cost of 16 basis points. In terms of liquidity, the fund occupies the third position in the small-cap ETF space.
VB is well diversified both in individual holdings, as well as sector holdings. Just 2.8% of its asset base of $26.2 billion is invested in the top 10 holdings. Foot Locker, Inc. (NYSE:FL) and Taubman Centers Inc. (NYSE:TCO) occupy top spots in the large basket of stocks.
In terms of sector exposure, the fund allocates 21.6% of asset base to financials, while industrials and information technology have a share of 17.1% and 16.3%, respectively. Over a period of one year, the fund delivered a return of 1.03%.
Russell 2000 Value Index Fund (NYSEARCA:IWN)
The Russell 2000 Value Index Fund is the oldest ETF which provides exposure to the small capitalization value sector of the U.S. equity market. The ETF seeks to provide investment results that generally correspond to the price and yield performance of the Russell 2000 Value Index before fees and expenses.
The product appears to be liquid, as approximately 1.3 million shares change hands on a daily basis. The fund invests its $3,723.7 million of net assets in 1,355 stocks. IWN invests just 4.6% of its asset in the top ten holdings, which suggest that it doesn’t face concentration risk. National Retail Properties, Inc (NYSE:NNN) and BioMed Realty Trust Inc. (NYSE:BMR) occupy the top two positions in the fund.
Among the sectors, financials, producer discretionary and consumer discretionary hold the lion’s share, makes up 64.8% of the total investment. (Play a Consumer Recovery with These Discretionary ETFs)
For the investment made in the ETF, the investor pays an expense ratio of 40 basis points. Due to heavy weighting towards financials, the fund delivered a negative return of 1.2% over a period of one year.
Dow Jones REIT ETF (NYSEARCA:RWR)
This ETF tracks the Wilshire REIT Index. It follows companies that operate real estate properties across the country. (Real Estate ETFs: Unexpected Safe Haven) The product utilizes a float-adjusted market capitalization technique and charges investors 25 basis points a year in fees for its services.
In terms of yield, the product pays out about 2.9% in 30 Day SEC yield terms while trading volumes are quite robust. With average volume over 230,000 shares, the Dow Jones REIT ETF has tight bid ask spreads as well, giving it low overall total costs.
The product holds 81 securities in total, including an 11.8% weighting to Simon Property Group (NYSE:SPG). Beyond that, no other company makes up more than 5.2% of the product, suggesting decent diversification.
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