Last updated on April 21st, 2022 , 12:51 pm
Highlights
- Most popular ETFs are priced at several hundreds of dollars; there are many low-cost funds that offer the same tracking for a greatly reduced price.
- Many ETFs can be divided into large-cap, mid-cap, and small-cap. Generally speaking, the better capitalized a company is, the less risk they have (and reward).
- It is important to note that “growth” ETFs generally have much more market risk than “value” ETFs or “blended” ETFs, which contain a combination of the two.
2022 is becoming the year of the exchange-traded fund (ETF). And it’s about time. ETFs offer investors perhaps the cheapest and best way to diversify their portfolios. Some broad-based ETFs (like Vanguard’s VTI) offers investors exposure to thousands of stocks. And all you have to do is buy one share!
However, many ETFs are not cheap. US stocks (equities) have been exploding in value lately. If you were to purchase every single stock within the S&P 500 on your own today, it would cost you $89,157,36.
I don’t know about you, but I don’t have that kind of money laying around. Even if I did, I don’t know if I’d want to spend the time not only entering the positions but constantly adjusting them to mirror the always-changing index!
This is where ETFs come in handy.
ETF (Exchange-traded fund) Definition: A security that trades on a stock exchange that tracks a particular set of pooled securities (like an index or a sector).
So instead of purchasing all of the 500 stocks in the S&P index, we could purchase an ETF that mirrors the index.
So how much would buying one share of an ETF representing the S&P 500 cost us? Below, I have listed the three most popular ETFs that track this index, along with their current market price.
SPY: SPDR S&P 500 ETF Trust $447.88
IVV: iShares Core S&P 500 ETF $449.90
VOO: Vanguard S&P 500 ETF $411.82
Affordable ETFs
So $400+ is still a lot cheaper than $89,157, but this article is about the best CHEAP ETFs, and $400 isn’t cheap to me! There are indeed cheaper options.
But are we giving anything up by going after some of the lower-priced ETFs? No! Many ETFs simply track indexes. As long as they do this accurately and for a reasonable fee (expense ratio) the price of the ETF shouldn’t matter. All but two ETFs on our list have insanely low fees of at or under 0.15%.
In addition to being more affordable to beginner investors, low-priced ETFs are also attractive to option traders who utilize the covered call strategy. In this strategy, you buy 100 shares of stock and sell (write) one call against this stock. When an ETF is trading over $400/share, you’ll need 40k+ just to do a one lot.
If you’re interested in learning more about options trading, please feel free to check out our video (or article), Options Trading for Beginners – 11m plus views, and counting!
Additionally, if you’d like to do a deep dive into the mechanics of how ETFs work, we have content on that as well. You can find both the article and the video below.
Market Cap Explained
Outside of the US, we have listed a few broad-based international ETFs. Within the US, our list spans across different “market caps” (capitalizations -Fidelity).
Market Cap (Capitalization) Definition: The total value of a company that is traded on the stock market. A company’s “market cap” is calculated by multiplying the total number of shares by the current share price.
So essentially, the market cap tells us the approximate net worth of a company. If you wanted to buy that company, that company’s cap is in the ballpark of what you would be paying. But since we’re talking about the cheapest ETFs out there today, we probably aren’t funded well enough to buy Apple.
A publicly traded company will always fall under one of three different market caps. We have listed top performers on our list from each of the below categories:
- 1. Small Cap Companies
Companies with a relatively small capitalization of under $2 billion.
- 2. Mid Cap Companies
Companies with market caps that range between companies $2 and $10 billion in value.
- 3. Large Cap Companies
Companies with market caps that exceed $10 billion in value.
Additionally, we have listed a few “broad-based” ETFs. These funds span across all market sectors and generally include the most companies within their baskets. If you are only going to buy one ETF and want a lot of diversification, broad-based (or “total market”) ETFs are the way to go!
Without further ado, let’s get to the list!
Broad-Based ETFs
Large-Cap ETFs
| Ticker | Fund Name | Market Price | Expense Ratio |
|---|---|---|---|
|
SPDR® Portfolio S&P 500® ETF |
$52.64 |
0.03%
|
|
|
JP Morgan US Momentum Factor Index |
$45.85 |
0.12% |
|
|
Vanguard Russell 1000 Growth Index Fund ETF |
$74.35 |
0.08%
|
|
|
SPDR® Portfolio S&P 500 Growth ETF |
$67.63
|
0.04%
|
|
|
NASDAQ-100 Equal Weighted ETF
|
$86.85
|
0.35% |
Mid-Cap ETFs
Small-Cap ETFs
Broad-Based International ETFs
Growth vs Value Companies
In the above list, most of the ETFs employ the “blend” approach to investing in companies. This means the ETFs have within them both “growth” and “value” companies.
However, you may have noticed a few funds on the list are “growth” exclusively. Growth stocks are typically younger and more exciting companies, and tend to get the most attention in the ETF space. Think Zoom and NVIDIA here.
Opposite growth companies are “value” companies, which are well established, typically dividend issuing companies that are less volatile. Value companies have been around for a long time. A couple value companies are Johnson & Johnson and Campbell soup.
Growth Companies
- Issues Small or No Dividends
- High Beta = High Risk
- Overvalued in Price
- Earnings to Growth Ratio > 1
Value Companies
- Typically Issues Larger Dividends
- Low Beta = Low Risk
- Undervalued in Price
- Earnings to Growth Ratio < 1
Historically, growth stocks tend to outperform value stocks. This should make sense – since the US stock market has been historically bullish over the long run, more “risk-on” stocks, such as those that fall under the growth umbrella, should appreciate more in value than less risky securities.
Take a look at the below chart, which compares the total returns (meaning dividends are included) between growth stocks (orange) and value stocks (blue) over the past decade.
We can see in the last few years, on the tail of Covid and stay-at-home policies, growth companies really soared.
Traditionally, growth stocks rise higher in bull markets, and sink lower in bear markets when compared to value stocks. This pattern, however, may not hold true forever in the modern world.
Final Word
There are thousands of ETFs currently listed. Though projectfinance has picked through some of the top performers with the lowest fees, they may not be suitable for you.
Remember, there is more to an ETF than its performance. Before investing in an ETF on your own, make sure to follow the below checklist:
- #1 Expense-Ratio
I have seen ETF expense-ratios higher than 5%. This means your investment has to make 5% on the year just to breakeven! Make sure to take the time to check this ratio before investing.
- #2 Historical Tracking
Issuers of ETFs have a fund information page, sometimes called a prospectus, that compares their fund with that of the representative index. For index-tracking funds, you ideally want a fund that closely matches the performance of the benchmark index.
- #3 Liquidity
The ease to enter and exit positions at a minimal cost is ideal. This is known as liquidity. This means high volume and tight bid-ask spread. The funds we listed are all very liquid.
However, not all ETFs are created equally. Years ago, I invested in an emerging market ETF to discover later the bid was $52 and the offer was $55. I could have lost up to 6% of my investment from simply entering and exiting a position! Make sure the spread between the bid and ask is tight, and the daily volume is high (preferably over 1 millions shares).
