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If you’d at least like a chance at beating the market but just aren’t a fan of investing in individual stocks, you’ve got options. Several exchange-traded funds offer the potential to outperform the SPDR S&P 500 ETF Trust (NYSEMKT: SPY), which — for better or worse — is only meant to mirror the the broad market’s overall returns. Here’s a closer look at three of your best long-term ETF bets for a retirement portfolio.
iShares MSCI Emerging Markets ex-China ETF
If you think the domestic large-cap market is volatile, then buckle up. The iShares MSCI Emerging Markets ex-China ETF (NASDAQ: EMXC) can throw investors even more serious curveballs.
Just as the name suggests, the iShares MSCI Emerging Markets ex-China ETF is a basket of companies domiciled in less-than-fully developed parts of the world (with the exception of China). India, Taiwan, and South Korea are the underlying index’s most represented countries, although no single one accounts for more than about one-fifth of the fund’s total value. The ETF holds more than 600 different stocks, in fact, giving you access to lots of equities you’d simply not be able to plug into any other way.
As I noted above, owning this fund is a bit of an adventure. Most of its holdings are smaller companies from regions that aren’t exactly known for economic stability. That’s why you wouldn’t want to make it the centerpiece of any retirement portfolio.
Nevertheless, it may be worth the turbulent ride. While many of these companies sell products and services to customers in richer economies like the U.S., China, and Western Europe, they’re also benefiting from the up-and-coming nature of their home countries. That means many of the underlying companies held by the fund have a chance at growing faster than businesses already heavily dependent on the developed world.
And sooner may be better than later if you’re going to take the plunge. Lisa Shalett, chief investment officer of Morgan Stanley‘s wealth management arm, recently wrote that an economic rebound in China, a weakening U.S. dollar, and trade tensions between those two countries are “three reasons why emerging markets may be more attractive to global investors in 2023.”
Vanguard Mid-Cap ETF
The whole point of indexing is avoiding the usual trappings of actively trading stocks. But there’s more than one index. The S&P 500 may not even be the most fruitful index for long-term investors to latch onto, in fact. That honor actually belongs to the S&P 400 index, which of course represents the United States’ mid-sized companies.
The chart below tells the tale. Since the beginning of this century, the S&P 400 has nearly tripled the gain dished out by the S&P 500. The two indexes ebbed and flowed in tandem — mostly — but mid caps led most of the marketwide advances. Also note how well mid-cap stocks held their ground following 2000’s tech-led meltdown.
That’s not always the case. Sometimes when the market as a whole is pulling back, mid caps suffer more than their fair share of losses. And regardless of its leadership (or laggardship), the S&P 400 tends to dish out bigger swings than the S&P 500 does. Translation? It’s not for the faint of heart.
If you can stomach the volatility, though, a mid-cap ETF like the Vanguard Mid-Cap ETF (NYSEMKT: VO) can be a great way to bolster your long-term retirement savings.
Global X Nasdaq 100 Covered Call ETF
Finally, add the Global X Nasdaq 100 Covered Call ETF (NASDAQ: QYLD) to your list of exchange-traded funds that can fire up a retirement portfolio.
A call option contract is essentially a bullish bet on the underlying instrument. The call buyer’s “option” is the right (but not the obligation) to purchase a particular stock or index from the call’s seller at a predetermined price at some point in the future. Call contracts gain value if that index or stock gains value. Conversely, call options lose value if the underlying stock or index falls. A covered call simply means you’re selling a call option to a buyer for stocks or ETFs that you already own, and as such wouldn’t have to buy them at the market price if the call’s buyer wishes to exercise the call option.
More to the point, covered calls are an effective way to generate a little short-term cash flow on long-term stock positions. Although the Global X Nasdaq 100 Covered Call ETF lost value last year in step with the Nasdaq 100‘s losses, what the chart below isn’t showing is the $2.19 worth of cash distributions made to the fund’s owners in 2022. That’s the equivalent to a dividend yield of 13%. And, you still own all the big tech growth names that make up the Nasdaq 100 index.
There is something of a catch. While covered calls generate solid cash flow in weak or falling markets, the strategy tends to underperform the broad market in bullish environments. That’s not necessarily a major liability, however. The Global X Nasdaq 100 Covered Call ETF’s overall net returns tend to smooth out market volatility, generating real cash when you often need and want it the most: in a lousy market.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Index Funds-Vanguard Mid-Cap ETF. The Motley Fool has a disclosure policy.
