Whether you're pleased or disappointed about the resumption of the Federal Reserve's rate-cutting cycle may depend on whether you are primarily a borrower or a saver. Regardless of where you fall on that spectrum, if you're an investor, now is a good time to review your portfolio and make some tweaks to accommodate — and capitalize — on a lower-rate regime.

The quarter-point rate cut from the Fed in September was the first since December 2024. The central bank followed this up with another one in October, and while it's too soon to call the December meeting, more rate cuts are expected in 2026.

Traders were recently betting that by next April, the federal funds rate (the interest rate that banks charge each other for overnight loans) would sink to a target rate of 3.25% to 3.5%, according to CME Group's FedWatch tool. That's a full percentage point lower than the Fed's benchmark rate in early September — two points lower than when the current monetary easing cycle began in September 2024.

The good news for investors is that lower interest rates are largely positive for stocks — even in the second year of a rate-cutting cycle. Dating back to 1990, the S&P 500 Index has gained an average 11% in price in year two of Fed rate cuts, according to Sam Stovall, a market historian and chief investment strategist at research firm CFRA.

Zeroing in on how the market performs following a pause of several months during a rate-cutting cycle, Ryan Detrick, chief market strategist at wealth management firm Carson Group, found that since 1970, the S&P 500 has been higher nearly 91% of the time in the year following the resumption of rate cuts, returning an average 12.9%.

Of course, a lot depends on the health of the economy and whether rate cuts are occurring when a recession is imminent or underway or when the economy remains relatively healthy. Looking at the 45 rate-cutting campaigns going back to 1954, market strategists at Glenmede, another wealth management firm, found that the average S&P 500 gain over the course of the cycle was 13%; with no recession the average gain was 24.2%, and with a recession it was just 6.6%.

"We look at the economy as still on fairly firm footing," says Detrick. Although there are signs of labor-market slowing, there is also evidence of stronger-than-expected retail sales, he notes. "We have an okay economy being led by very strong corporate earnings growth. A Fed rate cut is the cherry on top, and they are likely to cut well into 2026. That's bullish for equities," he says.

Strong stock sectors for Fed rate cuts

Historically, the sectors that have performed best in the second year of rate cuts include real estate, financials, tech, health care and consumer staples, according to CFRA. That might not be the case this time around: Although Stovall currently recommends investors overweight stocks in the financial and tech sectors (as well as communications services), he has an Underweight rating on health care stocks, and he sees real estate and staples shares merely keeping pace with the market.

It's simply too early to shift into sectors traditionally considered more defensive, says Detrick. He still likes large-cap stocks in the financial, tech and industrial sectors, which have been leaders in the current bull market. "We're sticking with the ones who brought us to the dance," he says.

Nonetheless, it's a good time now, especially if you're nervous about the market's highfliers, to make sure you have some exposure to midsize- and small-company stocks, he adds, as well as international fare.

Lower rates may be the catalyst long-suffering small-cap stocks have needed. Indeed, on the heels of the September rate cut, the Russell 2000 Index, a popular small-cap benchmark, hit its first new high since November 2021 — an interval when the S&P 500 set 89 new highs, according to Stovall.

As interest rates drop, "small-cap companies are likely to benefit disproportionately," note the strategists from Glenmede. That's because more than half of small-cap debt is issued at floating rates. "As interest expenses fall," they say, it "should provide a meaningful tailwind to earnings."

Moreover, small firms should see a more sizable benefit from corporate tax relief, while also being less exposed to the impact of tariffs than large companies, according to Glenmede. And despite the recent rally, valuations remain compelling compared with their blue-chip cousins. "Small- and mid-cap stocks could have a very long runway — well into 2026, we think," says Detrick.

A good way to add more exposure to mid- and small-cap stocks is with the iShares Core S&P Mid-Cap ETF (IJH) and the iShares Core S&P Small-Cap ETF (IJR). Both exchange-traded funds are members of the Kiplinger ETF 20, the list of our favorite ETFs. (Prices, returns and other data are as of September 30.)

Step away from cash

You've no doubt noticed that your cash is earning less. But further deterioration in the economy — continued weakness in the job market, say — could send cash yields to the basement. "The imperative to put cash to work is increasing," say strategists in the chief investment office at UBS Financial Services.

For short-term spending needs, stick with the modest yields on certificates of deposit and money market funds, they advise. For expenses that are one to three years away, consider a bond ladder, with IOUs of staggered maturities.

Cash earmarked for needs up to five years out can be invested in intermediate-term government or investment-grade corporate bonds, according to UBS. Baird Aggregate Bond (BAGSX), a longtime member of the Kiplinger 25, the list of our favorite actively managed no-load mutual funds, yields 3.9% and has ranked in the top half of similar funds in seven of the past 10 years.

Or, recommends UBS, consider a multi-sector bond fund, whose managers can pick and choose among a wide array of fixed-income assets.

One to explore is the Pimco Multisector Bond Active ETF (PYLD). The ETF, with a yield of 5.1% and a total return of 7.0% over the past 12 months, had a hefty stake in securitized assets (think pooled mortgage loans and the like) at last report.

Finally, investors looking to replace regular income from cash, and who can tolerate the higher risk of stocks, can seek out dividend payers, such as those found in the Kiplinger Dividend 15, our favorite dividend-paying stocks.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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The U.S. stock market has been notching new highs, which tends to kick up the likelihood of a market pullback (defined as a drop of 5% to 10%) or even a correction (a 10% to 20% sell-off). That's where the JPMorgan U.S. Quality Factor ETF (JQUA) comes in.

The fund – a member of the Kiplinger ETF 20, our favorite exchange-traded funds, invests in high-quality U.S. companies with robust profit margins and little debt. Over the past five years, the portfolio of 200-odd stocks has consistently held up better than the S&P 500 Index in down markets.

In the tariff swoon of early 2025, for instance, JPMorgan U.S. Quality Factor lost 16.7%; the S&P 500, 18.8%. The fund weathered 2022, a tough year, better than the broad-market benchmark, too. And yet, despite the fund's defensive characteristics, its five-year annualized return, 15.8%, has, for the most part, kept pace with the 16.5% climb in the S&P 500.

Quality hallmarks of this JPMorgan fund

But minimizing losses is just a fringe benefit of this index fund's quality focus. The fund's underlying benchmark starts with the 1,000 largest U.S. stocks and ranks them on 10 quality measures that touch on profitability, financial strength and earnings quality.

Companies with good return on equity (a profitability measure), free cash flow (money left over after operating expenses and spending to maintain or upgrade long-term assets) to sales, and cash flow interest cover (a gauge of a company's ability to pay its interest obligations using its operating cash flow), for example, will rank well. Low volatility and stable earnings, among other measures, also matter.

The firms that rank best in each quality measure, on average, make it into the fund, and stocks are weighted by average quality scores.

At last report, Nvidia (NVDA), Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT) and Broadcom (AVGO) made up the fund's top five holdings. But concentration at the top isn't a concern here: The five stocks account for just 11% of assets.

By contrast, the five biggest stocks in the S&P 500 — Nvidia, Microsoft, Apple, Amazon.com (AMZN) and Meta Platforms (META) —make up 28% of the index.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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In early July, like they've done so often before, investors focused on Warren Buffett, Berkshire Hathaway (BRK.B) and their latest 13F filing. A 13F is a quarterly disclosure of equity holdings by institutional investors with more than $100 million under management.

Most headlines focused on Buffett's new position in the troubled health care giant UnitedHealth Group (UNH), which was dealing with the assassination of a business unit CEO and a Department of Justice probe.

What caught some investors off guard, however, was new exposure to major U.S. homebuilders. The filing revealed roughly $800 million invested in Lennar (LEN) and about $190 million in D.R. Horton (DHI).

Immediate speculation suggested Buffett and Berkshire were betting on a cyclical rebound in home construction, supported by macroeconomic tailwinds – chiefly falling interest rates.

Lower mortgage rates reduce financing costs, stimulating new housing demand and boosting builders' margins. And this thesis is beginning to materialize.

In September and October, the Federal Reserve cut the target range for the federal funds rate by a total of 50 basis points to bring it down to 3.75% to 4.00%. Odds favor another 0.25% reduction at the next Fed meeting in December.

Homebuilder stocks have rallied modestly during this period, leaving room for investors who want to mirror Buffett's latest positioning.

For those who'd like to be efficient about it, the best homebuilder ETFs offer easy and diversified exposure at reasonable cost.

What are homebuilders?

Homebuilders don't merit a standalone sector under the Global Industry Classification Standard (GICS). They span several sectors, primarily consumer discretionary, industrials, materials, and real estate, like how infrastructure overlaps with utilities and energy.

At the center of the industry are the companies actually constructing new homes. Their business model is straightforward: acquire land, build residential properties and sell them for a profit.

Margins depend heavily on land costs, material prices and demand for housing, which fluctuates with mortgage rates and economic growth.

The biggest names include Lennar and D.R. Horton as well as NVR (NVR) PulteGroup (PHM) and Toll Brothers (TOL), often considered the "big five." These firms are highly cyclical, meaning their earnings and stock prices tend to rise during economic expansions and fall during downturns.

This volatility makes valuing them tricky, since price-to-earnings ratios can look deceptively high at cycle troughs and artificially low near peaks.

But the homebuilding ecosystem doesn't stop there. Those direct builders rely on a wide network of "enablers" that provide materials and services.

Sherwin-Williams (SHW), for instance, sells paints and coatings essential to new construction. Retailers such as Home Depot (HD) and Lowe's (LOW) are grouped here too, as they cater to both contractors and homeowners, a segment often called "home improvement retail."

The industry also includes suppliers of construction materials, furnishings, and building products ranging from HVAC systems and lighting to sofas and mattresses.

Many of these are mid-cap stocks and small-cap stocks, making them less familiar but vital parts of the residential construction chain.

Because this ecosystem covers such a range of activities and company sizes, investors need to pay attention to how homebuilder ETFs define their selection criteria. Some funds focus narrowly on direct builders, while others include related industries.

Weighting methods also vary. Market-cap-weighted homebuilder ETFs tilt toward large-cap stocks such as LEN and DHI, while equal-weighted versions give smaller players a larger role.

Regardless of approach, all homebuilder ETFs revolve around the same theme: capturing different stages of the residential construction process, from the first shovel in the ground to the final coat of paint.

How we picked the best homebuilder ETFs to buy

We had to adjust our usual criteria for evaluating ETFs – based on size, liquidity and fees – for the homebuilder category.

Unlike broad market or sector funds, the homebuilder ETF universe is small. As of November 10, VettaFi reported only six U.S.-listed homebuilder ETFs.

Applying strict filters for assets under management, expense ratios and bid-ask spreads would have left fewer than a handful of eligible funds.

At the same time, broadening the screen too far would defeat the purpose of a focused comparison.

So we chose to highlight the five largest ETFs by assets under management.

Rather than ranking them outright, we'll walk through each fund's advantages and trade-offs using our standard criteria while noting historical performance where relevant for comparison.

Here are the best homebuilding ETFs to buy.

Data is as of November 10.

iShares U.S. Home Construction ETF

• Assets under management: $2.6 billion
• Expense ratio: 0.38%
• 30-day median bid-ask spread: 0.03%

The iShares U.S. Home Construction ETF (ITB), which launched in May 2006, is the largest fund in this narrow category. ITB tracks the Dow Jones U.S. Select Home Construction Index, a modified benchmark weighted by market cap.

The index gives top billing to the big five homebuilders – LEN, DHI, NVR, PHM and TOL – but ranks retail giants HD and LOW lower, given their indirect role in actual home construction.

Performance has been strong. Since the aftermath of the 2008 housing crisis, ITB has delivered an annualized 10-year total return of 15.63% with dividends reinvested.

The tradeoff is higher volatility: Its three-year beta of 1.52 means it’s about 50% more volatile than the S&P 500.

ITB is best for investors seeking direct exposure to leading U.S. homebuilders who are willing to tolerate higher cyclical risk for potentially stronger long-term gains.

Learn more about ITB at the iShares provider site.

State Street SPDR S&P Homebuilders ETF

• Assets under management: $1.5 billion
• Expense ratio: 0.35%
• 30-day median bid-ask spread: 0.04%

The State Street SPDR S&P Homebuilders ETF (XHB) is the runner-up to ITB in size but takes a different approach. XHB tracks the S&P Homebuilders Select Industry Index, which equally weights all 35 of its holdings.

That means company size doesn't matter: Each stock receives the same allocation, and weights reset every quarter. As a result, top holdings shift frequently based on which names outperform between rebalances.

This equal-weighting method has both advantages and drawbacks. Over the past decade, however, that tilt toward smaller names hasn't paid off, as large caps have dominated.

XHB has returned 14.19% annualized with dividends reinvested – solid, but below ITB's performance.

XHB is best for investors who seek diversified exposure across the entire homebuilding value chain, including mid- and small-cap names, with a disciplined equal-weighted structure.

Learn more about XHB at the State Street provider site.

Direxion Daily Homebuilders & Supplies Bull 3X Shares

• Assets under management: $591.7 million
• Expense ratio: 0.95%
• 30-day median bid-ask spread: 0.21%

The Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL) is not a typical buy-and-hold industry ETF.

It tracks the same Dow Jones U.S. Select Home Construction Index as ITB, but NAIL uses three times leverage to magnify daily moves. This leverage resets every trading day – meaning returns are based on the index's daily performance, not long-term trends.

For example, if the index rises 1% in a day, NAIL aims to rise 3%. But if it falls 1%, the ETF should drop 3%. To achieve leverage, the fund primarily holds derivatives such as index swaps rather than the underlying stocks, adding counterparty risk.

Over time, compounding can cause performance to diverge significantly from the index's overall direction, especially in volatile markets. The 0.95% expense ratio further erodes returns over longer holding periods.

NAIL is best for experienced traders looking to make short-term, bullish bets on the homebuilding sector's daily momentum

Learn more about NAIL at the Direxion provider site.

Invesco Building & Construction ETF

• Assets under management: $295.3 million
• Expense ratio: 0.57%
• 30-day median bid-ask spread: 0.33%

The Invesco Building & Construction ETF (PKB) is an alternative to the market-cap-weighted ITB or equal-weighted XHB. PKB tracks the Dynamic Building & Construction Intellidex Index, which takes a fundamentals-driven approach.

The 30-stock index screens for price momentum, earnings momentum, quality, management action and value. Sponsors reconstitute and rebalance quarterly, adding new stocks or removing old stocks and adjusting weights back to target levels based on updated data.

This approach gives PKB a more dynamic mix of holdings, but it doesn't guarantee outperformance – especially after factoring in its higher 0.50% expense ratio.

Still, the strategy has delivered strong historical results, with PKB narrowly trailing ITB with a 15.21% annualized total return. PKB's past success doesn't predict future results. But it validates the potential of a fundamentals-based strategy.

PKB is best for advanced investors who prefer a more actively constructed, fundamentals-driven way to potentially outperform ITB and XHB.

Learn more about PKB at the Invesco provider site.

Hoya Capital Housing ETF

• Assets under management: $34.7 million
• Expense ratio: 0.30%
• 30-day median bid-ask spread: 0.22%

The Hoya Capital Housing ETF (HOMZ) is a smaller, boutique ETF, it's one of the most unique in the housing category. HOMZ tracks the proprietary Hoya Capital Housing 100 Index, which includes 100 companies spanning the full housing ecosystem.

Alongside homebuilders and retailers such as HD and LOW, HOMZ also holds residential real estate investment trusts, or REITs, giving it a blend of growth and income exposure.

Performance has been competitive, with a 10.25% annualized five-year total return. Its 0.30% expense ratio is also lower than most peers.

However, its small size – less than $50 million in assets under management – invites concerns about liquidity and fund longevity. Even so, the ETF may appeal to income-oriented investors thanks to its 2.65% 30-day SEC yield and monthly distributions.

HOMZ is best for income-seeking investors who want diversified housing exposure spanning homebuilders, suppliers and residential REITs.

Learn more about HOMZ at the Hoya Capital provider site.

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The same approach applies to portfolios. Earlier this year, many U.S. investors learned that their mix was off after foreign stocks significantly outpaced U.S. shares … just as the S&P 500 stumbled badly. It quickly became clear that many investors were underexposed to foreign markets and overexposed to the United States.

In a June survey, Schwab Asset Management found that moderate-risk individual investors held just 10% of their portfolios in foreign shares; U.S. stocks, by contrast, made up 61%. In short, investor portfolios weren't diversified.

It was a comeuppance long in the making. For nearly 15 years, U.S. stocks have been the place to be. Why bother to diversify — break up your investments across a variety of stocks, bonds and other assets — when the S&P 500 is beating everything?

"It can be easy to forget the benefits of diversification in a very sharp upward-moving market," says Andrew Altfest, a certified financial planner with Altfest Personal Wealth Management in New York City.

But over time, you'll find that a mix of investments can smooth your returns, strengthen your resolve as an investor, dampen risk in your portfolio and keep you exposed to whichever corner of the market is working at the moment — no crystal ball necessary.

In a truly diversified portfolio, some investments will be in favor while others are on the outs. "You will never own only winners, but you won't get stuck with only the laggards, either," says Jeff DeMaso, editor of The Independent Vanguard Adviser.

A smoother ride

A diversified portfolio can deliver less-volatile returns, which may help you stay the course during turbulent times — and arguably, that's half the battle in achieving your investment goals.

Moderate-allocation funds, also called balanced funds because they stabilize a 60% allocation of assets to stocks with a 40% stake in bonds, have been about one-third less volatile than an all-stock portfolio over the past 10 years.

"When the stock market sells off, investors tend to sell and move into cash. The problem there is, they've divested. So, we always say, stay invested and diversify," says Alessio de Longis, senior portfolio manager and head of asset allocation at Invesco Solutions.

Indeed, diversification isn't a strategy you turn on during rough markets and switch off in roaring bull markets. "It's something you should always have in your portfolio,” says Kristy Akullian, head of iShares investment strategy for the Americas at BlackRock.

Diversification can help ward against risk, too, of which there's no shortage these days. U.S. stocks are trading at high valuations. The economy looks to be slowing. Inflation remains sticky. And uncertainty lingers about the impact of new government policies and geopolitical risks. All of these challenges are chipping away at investor confidence.

Some advisers zero in on risks as a guiding principle for diversifying their clients' portfolios. Worried about a decline in the dollar? Add non-dollar assets — foreign stocks or bonds — to your portfolio. Concerned about an inflationary shock? Fold in a stake in commodities or real estate. A recession? Insert a slug of high-quality bonds or beef up on cash.

"Since I think all of these are potential sources of risk to the stock market, I put a lot of these diversified eggs into my clients' portfolio baskets," says Paul Winter, a certified financial planner at Five Seasons Financial Planning in Salt Lake City, Utah.

Another reason to diversify is that it's impossible to predict which investment will outperform in any given year — so it pays to own a mix of several. "The point of diversification is that you don't know what is going to happen," says Thomas Martin, of Globalt Investments, an Atlanta-based investment firm, but you can be prepared just the same.

The fact is, market leadership can shift dramatically from year to year. Though large-company stocks have topped the charts in many years recently, the winning asset class in any given year is often anybody's guess.

According to the Callan Periodic Table of Investment Returns, a colorful depiction of how asset returns can vary from year to year, small-cap stocks fared best in 2020. In 2018 and 2022, cash prevailed. And emerging markets stocks were the best-performing asset class in 2017; the next calendar year, they were the worst.

While there are rules of thumb to follow, a well-diversified portfolio is "very much an art, not a science," says Winter. For example, you want to own multiple kinds of assets, but that does not mean you own everything in equal measure. "Depending on your overall allocation, you might not need to go super-deep on every category," says Roger Young, a CFP at T. Rowe Price.

The good news: This is a great time to diversify. If, like many American investors, your portfolio is heavily weighted toward U.S. stocks, it's not too late to lighten the load and find opportunities in less-expensive pockets of the market.

"U.S. stocks are near their all-time highs, and that's a lot better time to diversify than, say, back in March 2009," the market's nadir during the Global Financial Crisis, says Winter.

Stocks, bonds and alternative assets are the main elements of a diversified portfolio. But you'll want to make sure you're diversified within those types of investments, too.

In this article, we'll walk you through the ingredients of a good diversification plan, with some timely moves to make now and tips on how to maintain your portfolio. Prices, returns and other data are as of August 31.

Stocks

Stocks can be risky but also rewarding. Over the past 10 years, the S&P 500, which represents more than 80% of the total U.S. stock market, has returned a whopping 15% a year.

But the stock market doesn't move as a monolith — and within your stock holdings, you should assemble a broad mix, considering a number of factors.

Company size

The market can favor companies of a particular size — sometimes for years — depending on economic factors, industry innovations or even just market sentiment.

Over the past decade, thanks to globalization, large companies have ruled, ranking as the top-performing asset class in five of the past 10 years and among the top three performers in eight of the past 10, according to the Callan table.

"The big just got bigger," says Jake Schurmeier, a portfolio manager at Harbor Capital. That makes exchange-traded funds (ETFs) that invest in small and midsize companies, such as the iShares Core S&P Mid-Cap (IJH) and the iShares Core S&P Small-Cap (IJR) — members of the Kip ETF 20, our favorite exchange-traded funds — good diversifiers for the large-cap S&P 500.

Some strategists see an opportunity in midsize-company stocks, especially these days. The middle tier of the U.S. stock market "is uniquely positioned to capitalize on growing demand for American-made goods and infrastructure solutions in a reshoring and energy-independent economic landscape," says Dina Ting, head of global index portfolio management at Franklin Templeton.

Plus, on a price-to-earnings basis, mid-cap stocks now trade at an atypical discount to large caps.

Concentration

Large-company stocks' recent run has included the meteoric rise of tech stocks in general and anything related to artificial intelligence (AI) in particular.

A group that includes Nvidia (NVDA), Microsoft (MSFT) and Apple (AAPL), known as the Magnificent Seven, accounts for one-third of the value of the S&P 500 Index. Thus, what might look like a diversified collection of U.S. stocks is in reality an outsize bet on a dazzling few.

A simple way to mitigate such overconcentration is the Invesco S&P 500 Equal Weight ETF (RSP). In this fund, every company gets an equal share of assets. So, while Nvidia accounts for 8% of the traditional market-cap-weighted index, it makes up just 0.24% of the Equal Weight fund.

Investment style

Professional investors typically hew to a certain methodology. These approaches break down into two broad styles: value and growth. Value managers favor stocks that trade at a discount to various metrics; growth managers prefer companies that are growing faster than average.

The two styles wax and wane at different times, and the cycles tend to last for long stretches. Value won the period from the start of 2000 to 2009. But since then, growth has dominated, though it's worth noting that value stocks held up better during the most recent bear market from January to October 2022.

Because it's difficult to predict when one style is going to outperform the other, even in a bear market, it's important to maintain a toehold in both growth and value strategies.

Chances are, however, that you've got plenty of exposure to growth stocks these days. Consider adding a value-driven fund such as Dodge & Cox Stock (DODGX), a mutual fund that has outpaced the S&P 500 over the past five years, or Capital Group Dividend Value (CGDV), an ETF that has beaten the S&P 500 over the past three years.

Both are actively managed, but index-fund lovers could look at the Vanguard S&P 500 Value ETF (VOOV). The ETF holds its own among a peer group of value-oriented large-company stock funds.

Geography

You need both U.S. and non-U.S. stocks in your portfolio, although many years of U.S. out-performance made that idea unpalatable. That changed in 2025: After lagging the U.S. stock market for nine of the past 11 calendar years, the MSCI EAFE Index, a popular international-stock benchmark, is up nearly 23% so far this year, beating the S&P 500 by more than 12 percentage points.

Most strategists agree that U.S. investors need to boost their exposure to international stocks. The timing is good. A weakening dollar tends to magnify gains in foreign shares (because they translate into more dollars stateside). And foreign stocks are still cheap relative to U.S. stocks on a price-to-earnings basis, even after a strong run so far this year.

Foreign stocks include those in both developed and emerging markets. You can zoom in on a region — Europe, Asia, Latin America, say — or a single country, such as Japan, India, Germany or China. And of course, at every level, you can focus on company size or value or growth approaches.

Start with the Vanguard Total International Stock ETF (VXUS). It's an inexpensive way to get instant exposure to nearly every foreign stock in developed and emerging markets. Morningstar analyst Zachary Evens calls it "wall-to-wall foreign-stock exposure." The fund has gained 23% since the start of the year.

Add an emerging-markets index fund. The iShares Core MSCI Emerging Markets ETF (IEMG) tracks an index of 20-odd developing markets. "A weaker dollar is good for EM stocks," says Richard Cook, a portfolio manager of Cook & Bynum fund. A recent rebound in Chinese stocks — 27% of the index — has helped the fund return 18% over the past 12 months.

Baron Emerging Markets (BEXFX) — a member of the Kiplinger 25, our favorite no-load mutual funds — is actively managed, growth focused, and has gained 19% over the same period.

These days, many strategists, including T. Rowe Price's Charles Shriver, see opportunity in small, foreign companies. They typically trade at a premium to their larger brethren, but not now. And "small-cap international stocks will benefit from domestic economic growth in home countries and are less sensitive to tariffs," he says.

We have our eyes on the Avantis International Small Cap Equity ETF (AVDS) and the Dimensional International Small Cap Value ETF (DISV). The Avantis fund invests in a mix of growth and value small companies, with a focus on valuation and profitability. Over the past 12 months, it has gained 23%. The Dimensional exchange-traded fund focuses on bargain-priced small stocks in developed countries and has returned 25% over the past 12 months.

Bonds

Bonds provide ballast to the stock side of any portfolio, generally speaking, because when stocks fall, bond values tend to rise. That didn't happen in 2022, when a precipitous rise in interest rates pushed both stocks and bonds down (bond prices and yields move in opposite directions). The S&P 500 fell 18%, and the Bloomberg U.S. Aggregate Bond index sank 13%.

It was the worst year ever for bonds, but a few fixed-income sectors held up better. Bank-loan funds, for instance, lost 2% on average; short-term bond funds dipped just 5%. Ergo, in 2022, a diversified bond portfolio would have outperformed the Agg index.

Broadly speaking, there are four major bond sectors: government, corporate, securitized debt (bundled IOUs such as mortgages or auto loans, say, that are sold as a single security), and municipal bonds, which pay income that's exempt from federal and sometimes state taxes.

A diversified bond portfolio will include a mix of sectors. The Agg index, for instance, is diversified as far as sectors go: Government bonds make up just less than half of the index, corporate and securitized debt combined are another 50%, and the rest sits in cash and muni IOUs. But there are more layers of bond diversification to consider.

Credit quality

Credit ratings reflect a borrower's financial ability to repay debts. The higher the rating, the more creditworthy the issuer is, and vice versa. That's why investment-grade bonds, rated between triple-A and triple-B, are considered high quality — there's little risk of default. Debt rated between double-B and triple-C is often called junk or high yield — there's a higher risk of default, and therefore yields are higher to attract investors.

Bond portfolios should hold mostly high-quality debt at their core. The Vanguard Total Bond Market ETF (BND) and the iShares Core U.S. Aggregate Bond ETF (AGG) are the biggest index-based high-quality bond ETFs. But we prefer active strategies, such as Baird Aggregate Bond (BAGSX) and Dodge & Cox Income (DODIX). Both mutual funds are members of the Kiplinger 25.

Then consider adding lower-quality debt, which can boost the overall yield of a bond portfolio. In late August, for instance, U.S. high-yield corporate debt yielded 6.7%, and bank loans, issued by companies with low credit ratings, yielded 8.6%.

Our favorite high-yield corporate fund, Vanguard High-Yield Corporate (VWEHX), favors higher-quality, double-B junk bonds. But with economic uncertainty ahead, we're partial these days to short-term high-yield bond funds such as the Pimco 0-5 Year High Yield Corporate Bond Index ETF (HYS). Its short-term focus can help dampen default risk, a concern if the economy slows.

Duration and maturity

Investors often confuse duration, a measure of a bond's sensitivity to interest rate moves, with maturity, the length of time a bond will pay interest before it repays the principal. They're not the same, but they are connected.

Maturity plays a part in the calculation of duration. The longer the maturity, the longer the duration and the more sensitive a security is to interest rate shifts.

The typical long-term government bond fund, for example, has an average maturity of 20 years and a 16-year duration. That implies if rates were to rise by one percentage point, the net asset value of long-term government funds would decline 16%, and vice versa. Short-term government bonds have an average maturity of three years and a duration of 2.6 years.

Generally, low-duration bonds are a defensive bet when interest rates are rising, and high-duration bonds stand to benefit most when rates fall. These days, however, even though cuts in short-term rates are on the docket, a fall in long-term rates isn’t guaranteed, says Akullian, the iShares strategist. That's why she favors intermediate-maturity bonds for now.

The iShares 3-7 Year Treasury Bond ETF (IEI) sports a 4.3-year duration. Since the start of the year, it has returned more than 5%. The actively managed Vanguard Intermediate-Term Bond ETF (BIV) favors bonds with maturities of five to 10 years and has a duration of 6.1 years. Its portfolio holds government and corporate debt of medium maturities. So far this year, it has gained 6.4%.

Finally, the Fidelity Investment Grade Securities ETF (FSEC) holds mostly triple-A-rated securitized debt and has a duration of 5.5 years. Its return so far this year is 5.3%.

Geography

For much of the 2010s, foreign bonds sported negative yields. "That's a hard sell," says Schurmeier, the Harbor Capital portfolio manager. But now, foreign bonds offer positive yields, as well as a potential return boost from a weakening dollar. The Vanguard Total International Bond ETF (BNDX) holds high-quality, foreign corporate and government bonds.

Emerging-markets debt offers fatter yields, but these IOUs tend to be more volatile, too, so buyer beware. Our favorite emerging-markets bond fund, Vanguard Emerging Markets Bond (VEMBX), invests in dollar-denominated debt, which becomes easier for developing countries to repay as the dollar weakens.

Alternatives

This catch-all category includes nontraditional strategies that seek to hedge stock and bond market returns, or at least to generate returns that don't move in lockstep with them.

Alternative strategies might focus on gold, commodities, cryptocurrencies, or the debt or equity of private companies. They might employ techniques to limit losses in a downturn but crimp bull market gains. Others balance bets on undervalued stocks by short-selling overpriced names.

"Many alternative strategies weren't even a thing 10 years ago, but they are today," says Winter, the Salt Lake City CFP.

Consider carving out a small slice from the bond side of your portfolio to devote to alternative assets — no more than 5% to 10% of your overall portfolio, says de Longis. One approach to choosing an alternative strategy is to figure out what kind of risk you're trying to hedge against, such as those listed below, and invest accordingly.

Inflation

To hedge inflation, for instance, beyond the protection the stock side of your portfolio may offer, consider commodities. These funds proved their mettle in 2022, returning 16%, on average.

The First Trust Global Tactical Commodity Strategy Fund (FTGC) has outperformed its peers in four of the past five calendar years, with below-average volatility. Neuberger Berman Commodity Strategy ETF (NBCM) boasts above-average returns with below-average volatility, and its expense ratio is below average, too.

Instability

To ward against uncertainty, consider gold. "Gold is a safety net for chaos," says Schurmeier. Trade-war fears have fueled 29% gains in the iShares Gold Trust Micro (IAUM) and the SPDR Gold MiniShares Trust (GLDM, $68, 0.10%) so far this year.

Volatility

To smooth out your returns, consider one of a new breed of ETFs called defined-outcome funds.

One we're eying is the Innovator Defined Wealth Shield ETF (BALT). Using options, the fund provides a 20% buffer on losses in the S&P 500 every three months in exchange for a cap on gains. You can hold the ETF indefinitely. The 20% buffer and cap on gains resets quarterly, in January, April, July and October. The cap set in early July was 2.2% after expenses. Over the past three years, Defined Wealth Shield has returned 7% annualized with less volatility than the Agg index.

Bear in mind that diversified portfolios, in contrast to Tolstoy's happy families, are not all alike. As always, everything depends on your time horizon and your risk tolerance.

"If you're relatively young and are primarily invested in stocks, you might want to make sure your diversification is robust on the stock side, but on the bond side, your small piece in bonds could be a straightforward U.S. investment-grade type of bond fund portfolio," says T. Rowe Price's Young. Similarly, those who are nearing retirement or already retired will want to pay special attention to some inflation hedges.

Over time, your portfolio will need some fine-tuning. Some tweaks are related to age or life stage, says Christine Benz, director of personal finance and retirement planning for Morningstar.

At age 50, for instance, you'll want to de-risk your portfolio a bit around the edges. Tilt toward high-quality, large-company stocks over small-cap fare, for instance. Or favor dividend payers. By your late fifties or early sixties, start shoring up your portfolio with safer assets. On the bond side, for instance, lean into high-quality short and intermediate-term bonds and build up your cash position.

Other adjustments may be tactical, such as investing more in large and midsize companies than in small firms if a recession looms, or favoring short-term bonds over long-maturity debt when interest rates are climbing. Keep the tactical moves to no more than five to 10 percentage points up or down from your overall portfolio targets, says Invesco's de Longis. Any bigger, and you risk derailing your asset-allocation plan.

Finally, review your portfolio asset mix and rebalance, if necessary, once a year. "The more diversified your portfolio, the greater the potential benefits of rebalancing," says Winter. Just don't go overboard. Think of your portfolio like a bar of soap, suggests Benz: "The more you touch it, the smaller it's going to get."

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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Since then, the Kensho ETF has returned a cumulative 25.7%. That doesn't beat the S&P 500, which has gained 45.0%, but it's far better than the cumulative 39.6% decline in the Invesco WilderHill Clean Energy ETF (PBW), the fund that the Kensho ETF replaced. In other words, a more diversified approach to investing in innovative technology, products and services has paid off.

The list of Kensho New Economies' top 10 holdings is loaded with stocks that have more than doubled in price over the past 12 months, including aerospace firms Elbit Systems (ESLT), up 136%, and Kratos Defense & Security Solutions (KTOS), up 187%.

Aerospace and defense firms, at 9% of assets, are the fund's biggest sector, followed by application software companies and firms that make electronic equipment and instruments.

Investors need to buckle up

Make no mistake: This index fund can still be volatile. Over the past 12 months, Kensho New Economies has been 60% more volatile than the S&P 500. From the start of 2025 through early April, worries about a trade war dragged the fund down 19.5% – a bigger decline than in the broad market benchmark.

But since April, investors have largely pushed aside any qualms related to tariffs, and growth stocks have begun to dominate the U.S. stock market again. Since the market's April 8 nadir, Kensho New Economies has soared 43%. That's well ahead of the S&P 500, which returned 30%.

And some of the fund's worst performers during the early 2025 swoon are now its biggest gainers, including Ouster (OUST), an electronic component company, which has risen 332% since early April, and communications equipment firm Viasat (VSAT), which has climbed 320%.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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An October 24 shareholder vote to approve the conversion of QQQ from its legacy unit investment trust (UIT) structure into a more modern exchange-traded fund (ETF) governed under the Investment Company Act of 1940 has been adjourned until December because management has not secured the required number of votes.

The UIT model, an older structure that predates ETFs, comes with strict limitations. UITs can't reinvest dividends or alter their portfolios once set, and they must replicate the benchmark exactly.

The structure also restricts how sponsors earn revenue. QQQ can only collect reimbursements for marketing and administrative expenses, not profits. Given that QQQ manages roughly $388 billion in assets, that restriction leaves a lot of money on the table.

Converting QQQ to a 1940 Act ETF would change that. It would slightly lower the fund's expense ratio from 0.20% to 0.18%, a small win for shareholders. More importantly, it would allow Invesco to earn management fees directly. ETF.com estimates the conversion could generate an additional $160 million in annual revenue for the firm.

When the proposal was announced in July, Invesco's stock surged intraday as investors anticipated the impact. Now, Invesco is using the delay to aggressively solicit votes. Still, QQQ doesn't define Invesco, and Invesco isn't just QQQ.

As prominent as QQQ is, the firm manages 239 other ETFs across equities, fixed income, commodities, and alternatives – many of which are growing in both size and popularity.

Understanding Invesco's ETF lineup

As of October 30, Invesco offers 240 U.S.-listed ETFs. While there are many ways to classify ETFs, Invesco organizes its lineup by overarching strategy, which is then divided by asset class.

One area seeing fast growth since the 2022 bear market – when both stocks and bonds fell as rates and inflation rose – is alternatives.

This category broadly includes anything outside of traditional equities and fixed income, such as absolute return (strategies seeking positive returns in all market conditions), bank loans (floating-rate, first-lien debt), commodities (futures-based funds tied to energy, metals or agriculture), currency (baskets of foreign currencies such as the euro, yen or pound).

It also includes digital assets (currently bitcoin and ether), hedged strategies (equity ETFs using options to limit downside risk), MLPs (midstream energy partnerships), preferreds (hybrid securities paying dividends), even real estate (REITs that generate income).

Still, Invesco's largest segment remains equity ETFs, which are mainly grouped by geography, sector, industry, factor and size. Sector ETFs include areas such as technology, energy and health care, while industry ETFs drill down into niches such as semiconductors or biotechnology.

Factor ETFs focus on styles including value, growth, quality, low volatility or dividend yield, while size-based funds target small-, mid-, or large-cap companies. Many combine these traits – for instance, a U.S. small-cap value ETF.

The same structure extends to fixed-income ETFs, where Invesco covers a range of durations, credit qualities and geographies. Offerings span traditional Treasuries and corporates to inflation-protected, municipal and securitized bonds such as collateralized loan obligations (CLOs).

A key feature of Invesco's fixed-income lineup is its "BulletShares" series – defined-maturity bond ETFs that hold bonds to a target maturity date, making them useful for laddering or income planning.

Finally, Invesco's growing thematic ETF family sits between sector and industry exposure, focusing on broad megatrends such as artificial intelligence (AI), genomics, water and clean energy.

Altogether, investors can find nearly any ETF to fit a specific thesis within Invesco's lineup. The firm's strategy aims to keep investors within its ecosystem by offering specialized choices well beyond its flagship QQQ.

How we chose the best Invesco ETFs to buy

Selecting the best Invesco ETFs isn't straightforward. With such a large lineup, the right choice depends on each investor's risk tolerance, time horizon and financial objectives.

For example, QQQ is easily the firm's most recognizable product and one of the best performers historically. But its heavy exposure to growth and technology may not suit lower-risk or income-focused investors looking for stability or yield.

Because of this, we focus on ETF attributes that should appeal to any investor, regardless of the underlying exposure. These are the usual three-part criteria of fees, size and liquidity.

Fees: We set a maximum expense ratio of 0.20%, ensuring cost efficiency remains front and center.

Assets under management: ETFs needed at least $1 billion in assets to qualify. Larger funds typically offer greater trading stability and a lower risk of closure.

Liquidity: We required a 30-day median bid-ask spread of 0.05% or less to make sure investors can enter and exit positions efficiently without incurring excess trading costs.

The goal isn't to simply rank funds by size or return, but to highlight "best in breed" options suitable for a wide range of investor profiles.

Here are the best Invesco ETFs to buy.

Data is as of October 30.

Invesco NASDAQ 100 ETF

• Assets under management: $67 billion
• Expense ratio: 0.15%
• 30-day median bid-ask spread: 0.01%

Until the flagship Invesco QQQ Trust converts from its legacy UIT structure, Invesco continues to offer the Invesco NASDAQ 100 ETF (QQQM) as a modern, buy-and-hold alternative.

QQQM undercuts QQQ's 0.20% expense ratio by five basis points, though it lacks QQQ's robust options market, which makes the latter better suited for active traders. For long-term investors, QQQM's lower costs and tax efficiency – supported by a modest 0.48% 30-day SEC yield – make it the smarter choice.

The portfolio includes the 100 largest nonfinancial companies listed on the Nasdaq, with heavy representation from the Mag 7 and more than half of its weight in technology.

That concentration has driven strong results, with a three-year annualized return of 31.91%. But it also introduces valuation and sector risk.

Learn more about QQQM at the Invesco provider site.

Invesco S&P 500 Equal Weight ETF

• Assets under management: $72 billion
• Expense ratio: 0.20%
• 30-day median bid-ask spread: 0.02%

If concentration risk in mega-cap tech stocks concerns you, the Invesco S&P 500 Equal Weight ETF (RSP) offers a simple remedy. Instead of weighting by market capitalization like the standard S&P 500, RSP gives every stock an equal 0.2% weight when rebalanced quarterly.

The result is a systematic "buy low, sell high" mechanism that keeps the portfolio diversified across all 11 GICS sectors.

Practically speaking, this curbs the dominance of technology while boosting exposure to financials, industrials and health care.

Over the last decade, RSP has lagged the S&P 500 slightly due to mega-cap outperformance and higher fees. But since its inception in April 2003, returns are within 30 basis points of the traditional index – a strong case for long-term consistency.

Learn more about RSP at the Invesco provider site.

Invesco MSCI USA ETF

• Assets under management: $9.4 billion
• Expense ratio: 0.04%
• 30-day median bid-ask spread: 0.02%

Invesco doesn't compete directly with Vanguard or iShares in the ultra-low-cost space, but the Invesco MSCI USA ETF (PBUS) is one of its most affordable offerings for core U.S. equity exposure.

For just 0.04% in annual fees – or $4 per $10,000 invested – PBUS provides broad access to more than 500 U.S. stocks weighted by market capitalization.

Although its composition looks similar to S&P 500 ETFs, the benchmark rules differ, creating slight variations in holdings and performance.

This distinction also makes PBUS a useful tax-loss harvesting partner for investors holding S&P 500 ETFs, as it avoids "substantially identical" classification that triggers the IRS's wash-sale rule.

Learn more about PBUS at the Invesco provider site.

Invesco S&P 500 Quality ETF

• Assets under management: $15 billion
• Expense ratio: 0.15%
• 30-day median bid-ask spread: 0.02%

Among Invesco's lineup of large-cap U.S. equity ETFs, the Invesco S&P 500 Quality ETF (SPHQ) targets the quality factor: companies with strong fundamentals and durable balance sheets.

Each stock is assigned a "quality score" based on return on equity, accruals ratio and financial leverage. Only the 100 highest-scoring companies are included, resulting in a narrower, higher-quality portfolio.

Industrials currently represent the largest sector weighting, followed by consumer staples, giving SPHQ a more defensive tilt compared with the tech-heavy S&P 500.

Historically, performance has trailed the broader market slightly due to lower technology exposure and higher fees. But the ETF may hold up better in downturns thanks to its focus on profitability and stability.

Learn more about SPHQ at the Invesco provider site.

Invesco S&P 500 Momentum ETF

• Assets under management: $13.3 billion
• Expense ratio: 0.13%
• 30-day median bid-ask spread: 0.02%

Momentum has been one of the most persistent equity factors over the past decade, and the Invesco S&P 500 Momentum ETF (SPMO) is built to capture it.

Fund managers select 100 stocks from the S&P 500 with the highest "momentum scores," calculated by dividing their 12-month price change by volatility. Constituents are weighted by both momentum score and market capitalization.

SPMO is reconstituted (eligible stocks are added and removed) and rebalanced (allocation weights are reset to maintain target exposure) twice a year, in March and September.

Over one- and three-year periods, the ETF has outperformed the S&P 500, though with higher volatility. SPMO leans cyclical, with about 34% in technology and 20% in financials.

Learn more about SPMO at the Invesco provider site.

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The famous Magnificent 7 trade – including Alphabet (GOOGL), Amazon.com (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA) – has been driving the market. But history suggests the mid-cap universe is consistently full of opportunities.

A September 2015 white paper by S&P Global (pdf) found that the S&P MidCap 400 Index had outperformed both the large-cap S&P 500 and the small-cap S&P 600 over the prior 20 years as well as across a range of rolling time frames.

Researchers credited this result to where mid caps sit in a company's life cycle. These firms have already cleared the hurdles that small caps face, such as securing financing and proving their business model.

Yet they remain nimble enough to keep growing faster than mature large caps.

In short, mid-caps uniquely combine stability with room for expansion.

Many mid-cap ETFs use S&P Global's indices as benchmarks, but they aren't the only options. Competing index providers have their own definitions of what qualifies as "mid cap."

How these indices are constructed can lead to meaningful differences in ETF performance. Understanding those distinctions is key before identifying the best mid-cap ETFs to buy.

Understanding the mid-cap space

There's no single definition of what qualifies as a mid-cap stock. For instance, Investopedia defines mid caps as companies with market capitalizations between $2 billion and $10 billion.

But for investors, narrowing the focus to a specific benchmark is often more practical. It allows for better comparisons of sector weights, valuation metrics and historical performance. For beginners, the S&P MidCap 400 Index is a useful starting point.

To be included in the S&P 400, a company must have a market cap between roughly $1.4 billion and $5.9 billion. A company can't appear in both the S&P 500 and S&P 400 at the same time, which prevents overlap between the large- and mid-cap universes. Each index is overseen by a committee that applies screens for earnings consistency, profitability and trading liquidity to ensure investability.

The composition of the S&P 400 differs meaningfully from large-cap benchmarks like the S&P 500. Mid caps tend to have heavier exposure to industrials, real estate and materials and less to technology and communications.

This reflects where mid-cap firms typically operate – industries that require physical assets, regional infrastructure and steady growth rather than global platform dominance or network effects.

Valuations also diverge. As of October 29, the S&P 400 traded at 2.64 times book value and 20.93 times earnings, compared with 5.63 and 30.96, respectively, for the S&P 500. That gap suggests mid caps are priced far more modestly relative to fundamentals, potentially offering better value without the extremes of small-cap volatility.

These characteristics apply specifically to how S&P defines mid caps. Other providers, such as Russell and MSCI, use slightly different size cutoffs or inclusion rules, which can widen or narrow the range of eligible companies.

Still, across methodologies, mid caps generally share a few traits: less overlap with major large-cap benchmarks, greater diversification across industries, and a balance between growth potential and financial maturity.

How we picked the best mid-cap ETFs to buy

As usual, the selection process begins by deciding which types of ETFs to exclude.

For mid caps, that means dropping actively managed funds. Despite reasonable valuations and less analyst coverage in this segment, active managers still struggle to deliver consistent long-term outperformance.

Evidence from the S&P Indices Versus Active (SPIVA) scorecards is clear. Over the preceding 15 years, 83.72% of all actively managed mid-cap funds underperformed the S&P MidCap 400 benchmark.

With those odds, it made sense to limit our picks to low-cost, index-tracking ETFs that deliver reliable exposure.

From there, we apply three main criteria: liquidity, assets under management and fees.

Liquidity: We focused on ETFs with a 30-day median bid-ask spread of 0.05% or less. Narrow spreads make it easier and cheaper for investors to trade without losing performance to transaction costs.

Assets under management: To ensure fund stability and lower closure risk, we required at least $1 billion in assets. Larger funds also tend to have better secondary market liquidity.

Fees: We capped expense ratios at 0.20%. Mid-cap ETFs are a highly competitive segment, so investors don’t need to pay up for exposure. This is a stricter standard than we’ve used for more specialized thematic or sector ETFs, where higher costs are harder to avoid.

Here are the best mid-cap ETFs to buy.

Data is as of October 29.

iShares Core S&P Mid-Cap ETF

• Assets under management: $99 billion
• Expense ratio: 0.05%
• 30-day median bid-ask spread: 0.02%
• 10-year annualized total return: 10.77%

The iShares Core S&P Mid-Cap ETF (IJH) is the most popular mid-cap ETF by assets, offering straightforward, low-cost exposure to the S&P 400 MidCap Index.

IJH distributes dividends quarterly, currently trading with a 1.27% 30-day SEC yield. And it trades more than 10 million shares on average every 30 days, making it among the most liquid ETFs in the U.S. market.

While IJH might seem like a "buy the haystack" option for mid caps, its underlying benchmark isn't purely size-based.

The S&P committee applies additional screens for profitability, liquidity and financial viability, which filter out weaker companies and make the index more curated than the name implies.

Learn more about IJH at the iShares provider site.

Vanguard Mid-Cap ETF

• Assets under management: $89 billion
• Expense ratio: 0.04%
• 30-day median bid-ask spread: 0.02%
• 10-year annualized total return: 11.39%

In typical Vanguard fashion, the Vanguard Mid-Cap ETF (VO) slightly undercuts IJH on costs with a 0.04% expense ratio, just one basis point cheaper, but meaningful for large portfolios or long-term compounding.

Liquidity is similar, but performance has been stronger over the last decade.

VO tracks the CRSP US Mid Cap Index, a benchmark that targets companies between the 70th and 85th percentile of investable market capitalization.

Eligible stocks must have a total market cap above $15 million, a public float exceeding 12.5% and sufficient trading volume to ensure liquidity. The fund fully replicates the index, holding roughly 290 companies.

Learn more about VO at the Vanguard provider site.

iShares Russell Mid-Cap ETF

• Assets under management: $44 billion
• Expense ratio: 0.18%
• 30-day median bid-ask spread: 0.01%
• 10-year annualized total return: 11.22%

The iShares Russell Mid-Cap ETF (IWR) is the sponsor's alternative to IJH.

While more expensive, IWR is slightly more liquid and may appeal to traders. It tracks the Russell MidCap Index, one of the broadest mid-cap benchmarks, with more than 800 holdings.

Despite the higher cost, IWR serves a useful role for tax-loss harvesting.

Investors who sell IJH to capture losses can swap into IWR without violating the IRS wash-sale rule, since the two track different indexes and are not considered "substantially identical."

Learn more about IWR at the iShares provider site.

Vanguard S&P Mid-Cap 400 ETF

• Assets under management: $4.6 billion
• Expense ratio: 0.07%
• 30-day median bid-ask spread: 0.06%
• 10-year annualized total return: 10.71%

If you prefer to stay within Vanguard's ecosystem, the Vanguard S&P Mid-Cap 400 ETF (IVOO) is its version of the S&P 400 MidCap Index tracked by IJH.

On paper, IVOO is slightly less appealing, with a higher expense ratio and a wider trading spread. The difference comes down to ownership structure.

Vanguard operates as a cooperative owned by its fund shareholders, while iShares is part of profit-driven BlackRock.

It's a subtle distinction, but some investors may prefer Vanguard's alignment of interests over the long run.

Learn more about IVOO at the Vanguard provider site.

Schwab U.S. Mid-Cap ETF

• Assets under management: $12 billion
• Expense ratio: 0.04%
• 30-day median bid-ask spread: 0.02%
• 10-year annualized total return: 10.25%

For investors prioritizing ultra-low costs, the Schwab U.S. Mid-Cap ETF (SCHM) is among the cheapest options in the mid-cap category.

Its 0.04% expense ratio translates to just $4 annually on a $10,000 investment. When competition is this tight, even a single basis point can matter over time.

SCHM tracks the Dow Jones U.S. Mid-Cap Total Stock Market Index, which includes about 500 companies.

This distinct benchmark also makes it a good tax-loss harvesting candidate for investors holding IJH, VO or other mid-cap ETFs, since the indexes differ.

Learn more about SCHM at the Schwab provider site.

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But despite their growing popularity, this investment category remains widely misunderstood by both advisers and investors.

Some view defined outcome ETFs as too complex for average portfolios, while others see them as silver bullets that have the potential to eliminate risk entirely.

The reality lies somewhere in between. Advisers who understand how these products actually work can use them strategically to help address specific client needs.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

The mechanics of defined outcome ETFs

Defined outcome ETFs (also referred to as buffered ETFs) promise specific return profiles over predetermined time periods, usually one to two years. Fund managers use options strategies to deliver outcomes that fall between traditional equity and fixed income investments.

In most cases, the fund includes a broad equity index while simultaneously buying protective puts and selling call options to create what's essentially a collar strategy packaged as an ETF with some additional subfeatures depending on the desired outcome.

This structure creates three key characteristics that differentiate them from traditional investments:

Downside protection. While risk can never be 100% eliminated, defined outcome ETFs offer various ways to help mitigate risk through the use of buffers, barriers and floors.

Upside participation. Unlike traditional principal-protected products, defined outcome ETFs allow investors to participate in market gains up to a predetermined cap, usually ranging from 8% to 15% annually, or in some other cases, you can get an "uncapped" profile while giving up some initial gains on the first few percentage points.

Time sensitivity. The protection and participation features apply only if the ETF held for the full outcome period. Selling early can potentially expose you to some or all of the volatility of the underlying reference assets. It's usually somewhere in between, depending on the time left.

Common misconceptions

Many advisers hesitate to recommend defined outcome ETFs to individual investors because of persistent myths and misunderstandings about their complexity and suitability. Understanding the facts helps separate legitimate concerns from unfounded fears.

Myth No. 1: They're too complex for average investors.

While the underlying options mechanics are sophisticated, the end result is straightforward: known upside potential with limited downside risk over a specific timeframe.

Investors don't need to understand options theory any more than they need to understand bond mathematics to own fixed income funds.

Myth No. 2: The fees are prohibitively high.

Expense ratios average 0.78%, higher than broad index funds but reasonable given the active options management required.

More importantly, the fee structure is transparent and predictable, unlike some structured products with hidden costs.

Myth No. 3: They eliminate all investment risk.

Defined outcome ETFs still carry market risk within their protection parameters. If the underlying index falls 20% and the ETF has 10% downside protection, investors still lose 10%.

There's also a risk that protection may not apply if the fund is sold before the outcome period ends.

Strategic applications in client portfolios

Defined outcome ETFs work best when used strategically rather than as core holdings, addressing specific client concerns that traditional asset allocation struggles to solve.

Consider clients approaching retirement who worry about market timing and sequence of returns risk. They face a challenging dilemma: They need continued equity exposure for growth, but they can't afford significant losses that might derail their retirement plans.

Defined outcome ETFs can bridge this gap between accumulation and distribution phases, providing meaningful upside participation while limiting the downside.

These products offer a different kind of value for anxious clients who struggle to stay invested during volatility. There's a psychological benefit to knowing the maximum loss, and this benefit often outweighs the opportunity cost of capped returns.

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Rather than watching nervous clients bail out of the market during corrections, advisers can use defined outcome ETFs to help keep them invested with downside protection that can help provide emotional comfort.

Defined outcome ETFs also serve as effective tactical allocation tools. Rather than trying to time the market with cash positions that earn nothing, advisers can use these products to maintain equity exposure while providing some protection during uncertain periods.

This approach can help keep clients invested in growth assets while acknowledging legitimate concerns about market conditions.

Implementation considerations

Success with defined outcome ETFs requires careful attention to timing and client communication. Unlike traditional mutual funds that can be purchased anytime, these products work best when initiated near the beginning of their outcome periods.

The protection and participation features reset with each new series, typically launching quarterly. Advisers should track upcoming launches and time purchases accordingly, rather than buying at random points during the outcome period.

Client education is equally important. Investors need to understand that these products are designed to be held for specific timeframes and that early redemption can expose them to options volatility that undermines the protection features.

Setting appropriate expectations

Defined outcome ETFs represent a middle ground between the full upside potential of traditional equity investing and the capital preservation focus of fixed income. They are most valuable for investors who prioritize downside protection over maximum return potential.

Investors need to be aware that there is a trade-off of capped upside participation for protection against significant losses. During strong bull markets, traditional index funds will outperform, while protection features provide meaningful value in severe bear markets.

Advisers would be wise to position these products as tools for specific situations rather than replacements for traditional asset allocation. They work well for risk-averse clients, those approaching major financial transitions or as tactical allocations during periods of heightened uncertainty.

As always, the key is matching the tool to the client's specific needs and timeline. For investors who understand the trade-offs and can commit to the outcome period, defined outcome ETFs offer a compelling way to participate in market growth while managing downside risk in ways traditional portfolios cannot replicate.

AE Wealth Management, LLC (AEWM) is an SEC Registered Investment Adviser (RIA) located in Topeka, Kansas. Registration does not denote any level of skill or qualification. Information regarding the RIA offering the investment advisory services can be found on brokercheck.finra.org. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. The personal opinions expressed by Ben Sullivan are his alone and may not be those of AE Wealth Management or the firm providing this report to you. This information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual's situation. None of the information contained herein shall constitute an offer to sell or solicit any offer to buy a security or insurance product. CFP Board owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the U.S. 4809206 – 9/25

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Since that day, Berkshire's "B" shares have fallen 12.6% — even as the broader market notched new highs, with the S&P 500 Index returning 11.8%. (Prices and returns are as of July 31, unless otherwise noted.)

You may be wondering if there's an alternative to a post-Buffett Berkshire. A few Berkshire Hathaway clones are on the market — firms with insurance at their core and portfolios of businesses and stocks built for long-term returns. Some funds either explicitly or implicitly follow the Warren Buffett way.

We looked at some of the options below. Fair warning: Replacing Buffett may be as difficult for your portfolio as it is for Berkshire.

Very little of the Berkshire transition was a surprise. Buffett has had stock-picking help for some time from Berkshire execs Ted Weschler and Todd Combs.

And Greg Abel, the man Buffett tapped as the next CEO, was first named a potential successor in January 2018. But Abel built his career as an energy executive, not a portfolio builder.

That seems to have spooked Buffett acolytes, who wonder whether Berkshire's magical long-run returns — a compounded 19.9% from 1965 through 2024 — can continue.

"Buffett is able to take his huge balance sheets and turn $1 into $2," says Vitaliy Katsenelson, a money manager and author of The Intellectual Investor. "I don't know how good Greg Abel is."

That sums up the uncertainty. But Buffett boosters suggest shareholders should remain patient.

Christopher Bloomstran, a St. Louis–based money manager, does not believe the stalled stock price "has anything to do with the likelihood that Greg is not going to do a bang-up job. I think he will. I think he's absolutely phenomenal."

Buffett's Canadian counterpart

Though Abel was born in Alberta, the man widely called "the Canadian Warren Buffett" is 75-year-old Prem Watsa, who founded insurer Fairfax Financial (FRFHF) in 1985 and serves as its chairman and CEO.

The stock trades over the counter in the U.S., and on the Toronto Stock Exchange (FFH), accessible via some brokers, including Fidelity, Interactive Brokers and Schwab. In either case, charges may apply.

With a $39 billion market value, Watsa's company has developed a similar — albeit smaller — following to Berkshire's. The Fairfax annual meeting is a multiday affair that attracts value-oriented investors from Canada and other countries.

A fan blog, the Corner of Berkshire & Fairfax, is dedicated to value investing forums and discussion of the similarities between the two companies.

Fairfax's results suggest why: The company's book value per share increased an average 18.7% per year from 1985 to 2024, while the share price increased at an annualized rate of 19.2%.

Watsa may be even more of a bargain hunter than Berkshire, and that has occasionally led to picking losers. Fairfax's portfolio has muddled along for years with a large position in BlackBerry (BB), the mobile-phone pioneer that has struggled to reinvent itself.

Fairfax has had some winners recently, though. A large position in Canadian steelmaker Stelco paid off handsomely when Cleveland-Cliffs (CLF) bought the company in 2024. Fairfax's one-third stake in Greece's Eurobank increased in value from $2.3 billion at the end of 2023 to $3.2 billion on March 31.

Stephen Boland, an analyst at brokerage Raymond James, says Fairfax is one of the most diversified insurers, both in the number of countries in which it operates and in the lines of insurance it sells.

The company is "still exposed to California wildfires — it took a big loss for that in 2024 — but it has tended to diversify the business really, really well on the insurance side," says Boland, who recommends the shares.

With what he believes was a "stellar" second quarter for the company's investment portfolio, the stock is his top pick in the Canadian insurance sector. It trades at about 10 times earnings for the year ahead, according to S&P Global Market Intelligence.

Berkshire Hathaway's insurance operations largely target consumers — its Geico subsidiary causes some analysts to categorize Berkshire as an auto insurer.

Markel (MKL), by contrast, is a "specialty insurer," with sophisticated customers. It sells products such as collectible-car insurance, liability policies for corporate boards of directors, and insurance against damage to offshore oil rigs.

Like Fairfax, Markel has encouraged comparisons to Berkshire. For 35 years, the company, headquartered in Virginia, has held a brunch in Omaha on the weekend of the big Buffett bash. More than 2,500 people reportedly attended the 2025 event.

Over the past 38 years, the company's share price has increased at an annualized rate of roughly 15%.

Berkshire stock is the single largest holding in Markel's portfolio, accounting for $1.7 billion worth of assets on March 31 — three times the size of the second-largest position. Alphabet (GOOGL), Brookfield (BN), Deere (DE) and Amazon.com (AMZN) round out the top five, with each position worth about $400 million to $500 million.

Markel's portfolio of stocks, like Berkshire's, accounts for a heavier proportion of assets than for most insurers, which tend to focus on bonds. A separate division, Markel Ventures, holds 100% ownership in 20 companies, many of which are manufacturers.

Analysts say they like Markel in the long run, but a recent spike in the shares, coupled with underwhelming insurance results, has cooled them on its near-term performance.

Activist investor Jana Partners disclosed in December 2024 it had taken a stake in Markel and wanted the company to spin off its ventures unit so that it would be a more attractive takeover target for a conventional insurer.

The Jana news boosted Markel's stock price, and it trades at about 20 times earnings for the year ahead, according to S&P. Just one of seven analysts who cover Markel rate it a Buy.

Given depressed profits, "I think they're trading kind of where they should be now," says analyst Robert Farnam, of investment firm Janney, who has a Hold rating on the shares.

But the stock may have appeal for investors who buy on dips or who have a long enough time horizon. "I consider Markel to be a terrific long-term investment," says Farnam. "This is the type of stock that you basically put into retirement accounts and forget about."

Loews (L) has an insurance company at its core and owns multiple businesses, including hotels and an energy pipeline company, so it, too, has drawn comparisons to Berkshire. But in many ways, Loews is more of a family conglomerate.

Benjamin Tisch, named CEO this year, is the third generation of his family to run the company, a component of the S&P 500, and members of the Tisch family own roughly 20% of the stock.

"Even though Loews is in the 500, there's low investor interest" because of the Tisches' outsize stake, says Catherine Seifert, an analyst with CFRA who stopped covering the company more than two years ago. "And they're not as diversified as Berkshire anyway. Honestly, if you want to replicate Berkshire, you're probably better off doing it with a series of exchange-traded funds."

Following Buffett's path

There are a handful of ETFs that explicitly follow Berkshire; but with the Buffett premium seemingly dissipating at Berkshire, you might be better off looking for other funds that incorporate Buffett-esque investing principles, such those focused on companies that enjoy wide "moats," says Aniket Ullal, head of ETF research and analytics at CFRA.

When Buffett explains his desire to invest in businesses with a long-term competitive advantage, he has long used the word moat, as in a waterway that surrounded castles of the Middle Ages.

A moat keeps potential competitors away from your business — in economic terms, it's called a barrier to entry. Berkshire's wholly owned subsidiary BNSF Railway, for example, has a moat: Only four major railroad companies remain in the U.S., and the probability that a new one will try to lay thousands of miles of track to compete is nearly zero.

The largest and oldest moat ETF is the VanEck Morningstar Wide Moat ETF (MOAT), which tracks the Morningstar Wide Moat Focus Index. The 52 companies in the index as of May 31 were the cheapest of what Morningstar considers wide-moat stocks, based on their discount to the research firm's estimate of their fair value.

The ETF's top three holdings at last report were Estée Lauder (EL), military shipbuilder Huntington Ingalls Industries (HII) and Allegion (ALLE), an industrial security firm.

Compared with similar funds, the portfolio is overweight in health care and consumer staples stocks and has less invested in consumer discretionary and financial services names, according to Morningstar.

In a market that has seen years of exuberance for high-growth names, however, the fund's philosophy has had a mixed track record. It returned 7.5% over the past 12 months, compared with 16.3% for the S&P 500.

Four times in the past decade, it has been in the top 6% of its fund category (U.S. large-company stocks with a blend of growth and value characteristics). But it had a poor 2024, ranking in the bottom 5%. The fund's expense ratio is 0.47%.

Another approach is to zero in on funds that focus on metrics that typically point to the kind of high-quality companies that Buffett favors.

We prefer the JPMorgan U.S. Quality Factor ETF (JQUA), a member of the Kiplinger ETF 20, the list of our favorite exchange-traded funds. The fund tracks an index that sifts for companies that meet 10 criteria, including measures of profitability such as strong earnings and cash flow; financial risk (low debt, high interest coverage, low share-price volatility); and earnings quality (consistent accounting practices).

It has returned 13.6% over the past 12 months, and its 0.12% expense ratio makes it one of the cheapest funds of its kind. Top sectors are technology, financial services and consumer discretionary stocks. Nvidia (NVDA) was the fund's top holding at last report. Berkshire Hathaway places in the fund's top 10.

Then again, perhaps you should follow Buffett's own investment advice for individual investors. In 1994, he told shareholders that by "periodically investing in an index fund, a know-nothing investor can actually outperform most investment professionals."

At Berkshire's 2020 annual meeting, he elaborated: "In my view, for most people, the best thing to do is to own the S&P 500 index fund. People will try to sell you other things because there's more money in it if they do." He has specifically suggested the low-cost Vanguard S&P 500 ETF (VOO), with an expense ratio of 0.03%.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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The Trump administration’s official position on China, according to the State Department’s website, seems reasonable: “The United States seeks a constructive, results-oriented relationship with China…. The United States uses a range of exchanges, dialogues, and people-to-people ties to pursue its goals.” I would argue that one of those exchanges involves stocks. But if you feel strongly about not investing in Chinese companies, then don’t. As Warren Buffett says, you don’t have to swing at every pitch.

Still, I find it hard to ignore China. It is the world’s second-largest economy in nominal terms (gross domestic product not adjusted for inflation) and first in purchasing-power parity (that is, based on what people in different countries can actually buy) — $10 trillion ahead of the U.S., according to the International Monetary Fund. The Economist projects 4.4% GDP growth this year, compared with less than 1% each for the U.S., Europe and Japan. Also, China has become not just an imitator but an unquestionable innovator.

China now accounts for 29% of the world’s manufacturing output, up from just 9% in 2004 and greater than the next four countries (U.S., Japan, Germany, and India) combined.

According to the World Economic Forum, China’s “culture of techno-optimism, coordinated institutions and economic readiness has allowed artificial intelligence to scale with unprecedented speed.” Cutting its coal dependency by one-fourth and boosting renewables, China increased its electricity-generating capacity — essential for AI and advanced manufacturing — two and a half times from 2010 to 2024, while the U.S. and the EU practically stood still.

China is jumping hurdles

China has problems, among them a glut of unsold real estate and the enmity of the U.S. Both Donald Trump and Joe Biden have hit China with big tariffs and export controls on technology.

So far, China has proved resilient, in part because U.S. industry needs China’s rare earths and more-prosaic components for manufacturing and because consumers demand low-cost Chinese goods. In May, because of tariffs, Chinese exports to the U.S. fell 35% but still rose globally by 5%.

Markets are impressed. After three years of double-digit losses, Chinese stocks recovered in 2024 and are far outstripping U.S. shares in 2025. (Stocks mentioned here trade as American depositary receipts. Prices and returns in this column are as of June 30; securities I like are in bold.)

China’s government is encouraging new industries, and it leads the world in industrial robotics and electric vehicle production. Though effectively banned from the U.S. because of 100% tariffs, Chinese EV maker BYD (BYDDY, $94) is number one in the world, eclipsing Tesla (which was allowed to sell 637,000 EVs in China last year).

BYD is also the world’s largest producer of rechargeable batteries. Its new technology adds 250 miles of range in five minutes; no competitor comes close. BYD benefits from government subsidies, but it has also figured out how to produce EVs cheaply. It sells a model in China for $8,000, in the U.K. for $26,000 and in Mexico for $21,000. The cheapest Tesla in the U.S. is $42,000.

Buffett’s Berkshire Hathaway invested in BYD stock in 2008, and since then, according to Morningstar, the original stake has increased in value by at least 25 times. Shares are pricey, but the business has more than tripled its revenues in three years.

Another Chinese company, Xiaomi (XIACY, $39), created a sensation in June with an electric SUV that drew 289,000 orders in the first hour. Xiaomi is also the world’s third-largest smartphone maker, after Samsung and Apple, and makes home appliances and TVs. Shares have more than tripled in 12 months, partly because of threats that tariffs will drive the iPhone’s price higher.

A smaller, premium EV company, XPeng (XPEV, $18), has 4,000 orders for a flying car — combining a ground vehicle with an aircraft module — which will enter production next year. The stock has more than doubled in the past year, but it remains far below its late-2020 high.

Food-service company Meituan (MPNGY, $32) has interests in health care and travel as well. It is using low-altitude drones to deliver meals in Beijing, Hong Kong, Dubai and dozens of other cities. In the most recent quarter, revenues rose 18% from the same quarter a year ago. Its business is mostly domestic, insulating Meituan from trade wars.

NetEase (NTES, $135) is one of the world’s largest providers of video games. After being flat since COVID, shares took off this year, returning 53.0%. But like many Chinese stocks, NetEase, with a market capitalization (shares outstanding times price) of $85 billion, is moderately priced.

China’s Amazon.com

Shares in Alibaba (BABA, $113) offer more opportunity — and more risk. When the e-commerce and cloud-computing giant, akin to Amazon, went public on the New York Stock Exchange in 2014, it was valued at more than $200 billion, a record. But in the three years after the Chinese government’s 2021 crackdown on high-flying tech firms, and with questions swirling about Alibaba’s finances, the stock lost three-fourths of its market cap. Shares have made a comeback over the past 12 months, and my guess is that Alibaba will live up to its original promise. The price-earnings ratio is only 12.

Such low valuations are a big part of China’s appeal to investors right now. MSCI, the index provider, reports that the forward P/E of its China index, which captures 85% of the country’s stock universe, is just 11.

China ETFs

The best way to own China is through diversified exchange-traded funds such as iShares China Large-Cap (FXI, $37), which returned 29.0% in 2024 and is up 21.7% so far this year. Another good choice, SPDR S&P China (GXC, $88), has returned 31.3% over the past 12 months — more than twice as much as the S&P 500.

Also attractive is Franklin FTSE China (FLCH, $22), which has been an excellent performer and has a lower expense ratio (0.19%) than its competitors. The fund’s top asset is Tencent Holdings (TCEHY, $65), the gaming and social media company that, like Alibaba, took a dive during the government’s big-tech crackdown but has been rising briskly over the past year. In the most recent quarter, Tencent’s revenues rose 13% and profits went up 14%. Tencent is also making a big bet on AI.

China is hoping to capitalize on the chaos the U.S. has unleashed on global markets. But the nation still lacks a robust domestic consumer market, a reputation for rule of law and a group of trillion-dollar Silicon Valley–style tech companies whose cutthroat competition generates mutual benefits. In short, these are still early days for the Chinese economy — a condition that holds both danger and opportunity for investors.

James K. Glassman chairs Glassman Advisory, a public-affairs consulting firm. He does not write about his clients. He owns none of the securities mentioned here. You can reach him at JKGlassman@gmail.com.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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Specifically, an SEC ruling could allow dozens of asset managers to offer existing mutual funds as ETF share classes.

That might sound like technical minutiae … a distinction without a difference. Investors already have thousands of ETFs and mutual funds from which to choose. What difference would it make if the ETFs themselves were simply a share class of a mutual fund?

Some of this comes down to taxes. There are very real differences in the ways that ETFs and mutual funds are taxed, so the SEC's decision — expected to come down within the next several months — will matter a lot for most folks investing in a regular taxable brokerage account.

It's also a potential win for fund managers, as it opens their existing strategies to a broader pool of investors.

Are there benefits for investors? Are there any drawbacks that investors should be aware of?

Let's take a look.

What is the SEC considering when it comes to mutual funds and ETFs?

It's normal for mutual funds to have multiple share classes that vary based on fees, sales loads or account minimums.

Back in the early 2000s, Vanguard patented a clever setup that let an exchange-traded fund be just another share class of an existing mutual fund.

This meant one mutual fund could offer both traditional mutual fund shares and ETF shares that were both backed by the same underlying portfolio, management and performance record.

That patent expired in 2023, leading to a flood of requests from other fund managers. To date, more than 60 have petitioned the SEC for regulatory relief that will allow them to issue ETFs as share classes of existing mutual funds.

The SEC doesn't have a reputation for moving quickly. As with most government regulators, there is a process, and that process is often slow and bureaucratic.

We're starting to see movement, though. In March, then-Acting SEC Chairman Mark Uyeda instructed staff to prioritize reviewing these petitions.

Given the Trump administration's preference for deregulation, the likelihood is that a decision will happen within the next few months that will open the floodgates for ETF share classes of existing mutual funds.

Why do mutual funds want ETF share classes?

There are plenty of reasons for fund companies to petition the SEC to allow for ETF share classes of mutual funds.

To start, this allows them to keep their track record of fund performance, which in some cases can stretch back decades, as the ETF would be considered part of the existing fund as opposed to a new one.

This would also be true of existing ETFs that wanted to offer mutual funds for 401(k) plans. As things stand now, an ETF with a great long-term performance wouldn't be able to mention the track record if an identical strategy was created in a mutual fund format.

It's also potentially cheaper and faster to create a new share class than to launch an entirely new product.

But mostly, it's about taxes.

Mutual funds and ETFs are taxed differently because of how investor flows are handled.

In a mutual fund, when investors redeem shares, the fund often has to sell securities to raise cash. Those sales can generate realized capital gains, which must be distributed to all shareholders — whether they sold shares or not — creating a potential tax bill for all fund holders.

I sell my shares, and you get stuck with the tax bill. It's not exactly an ideal situation.

By contrast, ETFs use the in-kind creation/redemption process. Large institutional investors can exchange baskets of the underlying stocks for ETF shares (and vice versa) without the fund selling holdings.

This allows ETFs to get rid of appreciated securities without triggering taxable gains inside the portfolio and soaking their investors.

Because Vanguard had ETFs as share classes of its existing mutual funds, its mutual funds were able to piggyback on the ETFs' tax advantages. The Vanguard 500 Index Fund (VFIAX), for instance, hasn't paid a capital gains distribution since 2003.

Why this matters to investors

It's always nice to have options at your disposal, and having an ETF version of your favorite mutual funds isn't a bad thing.

Existing investors in mutual funds might also get a tax break. As we saw in the case of the Vanguard S&P 500 index fund, the mutual fund was able to shift would-be capital gains into its ETF share class and avoid making capital gains distributions.

Other mutual funds could potentially be able to do the same, though it should be mentioned that having an ETF structure of an existing fund doesn't guarantee that capital gains distributions will be eliminated.

If a fund manager trades aggressively to the extent that the gains can't be offset by in-kind redemptions, there might still be taxable distributions to deal with.

It can also go the other way. Just as mutual fund investors might benefit from ETF tax efficiency, exchange-traded fund investors could end up dealing with mutual fund tax inefficiency if the assets are comingled.

This would be a particular risk in cases in which the ETF share class was a relatively small part of the overall fund and the fund generated substantial realized capital gains.

In a tax-advantaged account such as an IRA or 401(k), none of this is a major concern. A tax-paying investor should consider this, particularly for a new ETF share class of a large existing mutual fund that does a lot of active trading.

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Making the right choices among all these types of assets is difficult, let alone finding the bond funds to suit your needs.

One solution may be actively managed, multisector bond exchange-traded funds (ETFs), which offer a kind of one-stop shop for investing in debt. Unlike passive funds that follow a bond index, these ETFs are run by managers who pick and choose among a wide range of assets, some of which have previously been available only to big institutional investors.

The funds have "democratized a lot of categories that were hard for individual investors to access," says Aniket Ullal, the head of ETF research and analytics at CFRA.

To be clear, multisector bond mutual funds have been around for decades. But the ETF versions of the strategy are relatively new, with nearly half of the ETFs included in Morningstar's multisector bond category trading only since the beginning of 2024.

But that doesn't mean they have no track records to review. Some companies converted their multisector bond mutual funds into ETFs, bringing along their return history. And many of the new ETFs have the same managers and strategies the companies have used for years in mutual funds.

So far, investors seem to like what they see. In 2024, these ETFs pulled in almost $13 billion in assets, up from just $3 billion the year before. That made multisector bond ETFs one of the fastest-growing ETF categories of the year.

Multisector bond ETFs provide a little extra oomph for investors

Multisector funds aim to provide more return than a traditional bond fund, without too much extra volatility.

On a spectrum of risk, industry experts say, a multisector bond fund falls between a "core-plus" fund, in which traditional bond investments are supplemented with slightly riskier assets, and a high-yield fund, in which very few of the holdings are investment-grade debt.

Most of the multisector bond funds Kiplinger examined for this article have about one-third to one-half of their money in assets that have single-A ratings or better from the debt-ratings services.

Multisector bond funds "are incrementally more risky, but they're going after incrementally more reward," said Daniel Sotiroff, an analyst at Morningstar Research Services. He likens them to "free-range bond funds: They can kind of invest in a little bit of everything, and they don't really have a lot of constraints."

That freedom to invest in all sorts of debt, however, means investors "really do have to look under the hood and figure out what's in them," says Kirsten Chang, an analyst at ETF research firm VettaFi.

We did just that below with funds we think are worth exploring. Prices, returns and other data are as of May 31, unless otherwise noted.

Five multisector funds for investors to consider

One of the top funds in the category is the JPMorgan Income ETF (JPIE). Andrew Norelli, one of the fund's managers, developed JPMorgan's multisector bond investment strategy in 2014; the ETF debuted in late 2021.

Norelli has invested heavily in securities backed by residential and commercial mortgages, many of which come with a government guarantee.

His allocation to these securitized products is more than twice the average for the category, according to Morningstar. With the government backing, just over half the portfolio is in assets rated single-A or above.

Norelli says the securitized assets he's been buying are "much cheaper" than corporate bonds that are similar in risk. "It's the not-so-secret way that we have been able to keep the volatility of the portfolio low" while producing returns similar to a high-yield bond fund, he says.

The fund has an average duration (a measure of interest rate sensitivity) of about 2.8, which is lower than many funds in the category and well below the duration of 6 for the Bloomberg U.S. Aggregate Bond Index, Norelli says.

A duration of 2.8 implies that the fund's value will fall by roughly 2.8% if interest rates rise by one percentage point – or will rise by a like amount if rates fall by one point.

Uncertainties in the geopolitical and monetary climate have "encouraged us to keep the interest rate risk of the portfolio relatively low," he says.

The fund yields 6.3%. Its expense ratio of 0.39% puts it among the very cheapest in the category, and its one-year return of 7.6% ranks in the top third of the category.

Bond giant Pimco has an even longer history. Sonali Pier, one of the managers of the Pimco Multisector Bond Active ETF (PYLD), says her company began the strategy more than two decades ago.

Although the ETF is a newbie, debuting in June 2023, it's already the second-biggest ETF in the category, with more than $5 billion in assets.

The Pimco fund holds about half as much corporate debt as the typical fund in the category, according to Morningstar, and it has less in bank loans and emerging markets than its peers. It also has more securitized mortgage debt than the typical fund in the category, focusing on assets that are government guaranteed.

Pier says the portfolio holdings represent a choice to be "positioned with resilience" in high-quality assets, with an eye to scooping up higher-yielding corporate debt if it becomes more attractive.

"You can build a diversified, high-quality portfolio with a pretty attractive yield without having to go really deep into economically sensitive areas," she says.

The fund yields 5.5%, and its expense ratio of 0.69% makes it costlier than many of its peers. Its one-year return of 8.8% puts it in the top 9% of funds in the category.

A category giant

Though parent BlackRock launched it only a little more than two years ago, the iShares Flexible Income Active ETF (BINC) has more than $9 billion in assets.

The fund is managed by Rick Rieder, BlackRock's global chief investment officer for fixed income and Morningstar's 2023 Outstanding Portfolio Manager. "He's kind of a rock star manager," says VettaFi's Chang.

More than 50% of the portfolio is invested in securities rated single-A or higher. More than one-fourth of the assets are currency derivative contracts, which funds can use to hedge the currency risks in international holdings or bet on the movement of one currency relative to another.

The fund's huge size and iShares' longtime focus on affordable products gives it an advantage on annual expenses, with a ratio of 0.40%. The fund yields 5.8%, and its one-year return of 7.1% puts it in the middle of the category.

The TCW Flexible Income ETF (FLXR) debuted in June 2024, but it's actually older than that: It was converted from a mutual fund that launched six years earlier.

"It's one of the few funds in the space that actually has a track record going back to 2018," says co-manager Jeffrey Katz. "The team and the strategy have been consistent since its inception."

Changing from a mutual fund to an ETF was rocket fuel. The fund had about $300 million in assets before the conversion; it has now more than tripled in size, topping $1 billion.

Morningstar analysts say an early bet on securities backed by commercial mortgages drove the fund to category-leading performance from 2018 to 2024 – something they say "is unlikely to be repeated."

Still, the fund's performance is holding up: It yields 5.9%, and its 9.4% one-year return puts it in the top 4% of its peers. Its expense ratio, at 0.40%, is among the category's best.

Katz says the market is being "complacent" about risk, so he has moved the fund into higher-quality assets than he'd hold in a normal market.

The fund is about one-third government debt – greater than the category average of 22%, although Katz says most of that is higher-yielding securities insured by the government. "We're not sitting in Treasuries; we have less than 3%."

The fund holds fewer corporate bonds than a typical fund in the category. "As we move into what we think is a slowing economy, I'd much rather own something that is not going to be impacted by weakening economies," says Katz.

The Hartford Strategic Income ETF (HFSI) is taking a different tack that appeals to investors with a bit more of an appetite for risk.

According to Morningstar, the fund has larger stakes in high-yield bonds, emerging-markets debt and bank loans compared with other funds. Just 42% of the fund is in assets rated single-A or above, a smaller proportion than many of the category's leaders.

"You're almost getting into that high-yield bond sort of category, but you're not quite there," says Morningstar's Sotiroff.

Wellington Management runs the fund for Hartford. Campe Goodman, a co-manager of the fund, is a 25-year veteran of Wellington who launched the company's multisector bond investment strategy in 2012.

"Wellington Management's team and resources rival the industry's best," says Morningstar analyst Tom Murphy.

Goodman says he typically loves U.S. high-yield corporate debt, but he isn't finding many good values there now. Instead, he's looking at corporate bonds in emerging markets.

"Over the past few years there has been a lot of concern about growth and macro-economic issues in emerging markets, but there have been a lot of companies that have done very well."

Examples are power utilities, telecoms and water and sanitation companies, which don’t have their fortunes tied to exports.

The fund is also finding opportunities in Europe, such as real estate debt and Eastern European banks. "You can always say there are babies being thrown out with the bathwater."

The fund yields 6.1%, and its one-year return of 8.7% puts it in the top 11% of funds in the category. Its expense ratio of 0.49% is cheaper than the category average.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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After two decades in the ETF world, I can't help but see the similarities between barbecue season and investing. In both cases, there is no single right approach.

In 2025, ETF investors are mixing things up more than ever, building portfolios with the same kind of personal flair you find on a backyard grill.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

The no-fuss griller

Some keep it simple. They go with a propane grill, classic beef patties with a dash of salt and pepper and reliable sides. Nothing flashy, but this method generally allows for reliable results. That's the passive ETF investor.

These portfolios lean on broad, low-cost market exposure and often include international allocations. In a year where diversification matters more, we've seen growing interest in ETFs that go beyond U.S. borders to capture opportunities in developed and emerging markets.

This is especially relevant in 2025, as U.S. equity valuations remain high and investors seek more balanced risk-adjusted returns.

Index-based ETFs are the foundation for many portfolios, and they continue to attract inflows because of their clarity, efficiency and low costs. For investors looking to "set it and forget it," passive ETFs still make a lot of sense.

The recipe-follower

Then there are those who have perfected their recipe over time and know exactly what goes into the mix. My Uncle Mike's burgers, for example, include egg, corn flakes and garlic salt, all added in careful proportion to the amount of 80/20 ground beef.

This approach takes more effort upfront, but it consistently produces expected results.

The same applies to investors who use factor-based ETFs to screen for attributes like quality, value or momentum. Their strategy is rules-based and designed to optimize outcomes over time.

Factor investing has had a resurgence in 2025, as volatility, dispersion and sector rotations have created opportunities for more precise portfolio tilts. Investors are leaning into strategies that can target specific outcomes, whether that's downside protection, income generation or long-term growth potential.

The pitmaster tinkerer

Finally, some grill masters bring their own flair. They may know the basics, but they like to adapt. They test new marinades, rotate dishes depending on the crowd and fine-tune their technique as they go.

That's the active ETF investor in 2025. These investors want professional insights and flexibility in one wrapper, and they are increasingly using actively managed ETFs to adjust in real time to what the market presents.

The appeal of active ETFs is growing fast, particularly in areas where research-driven insights and nimble decision-making offer potential advantages.

This includes fixed income, where duration positioning has been critical as interest rate expectations shift, as well as equity strategies that aim to sidestep frothy parts of the market.

What the 2025 flows show

Through the first half of the year, U.S. ETFs brought in hundreds of billions in net inflows. According to Morningstar:

• Roughly 55% of those flows went to traditional passive strategies
• About 8% went to smart beta or factor-based ETFs
• And nearly 37% went to active ETFs

That kind of split reflects what many investors already know — there is no single way to invest, and today's ETF market gives you the tools to build your own recipe.

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It also shows that ETFs are no longer synonymous with just indexing. The wrapper has evolved, and today it houses strategies that span the full spectrum, from core market exposure to highly tailored active approaches.

Whether you're seeking global diversification, tactical plays or outcome-oriented strategies, ETFs offer a format that delivers cost efficiency, transparency and accessibility.

Freedom to invest your way

The ETF marketplace today is like a packed grill. Some investors want a simple approach, others prefer to follow a detailed playbook, and plenty prefer the freedom to adapt.

ETFs can support all three styles, and the data shows that investors are embracing the full menu.

As August kicks off, it's a good time to reflect on the flexibility today's markets offer and the freedom investors have to build portfolios that match their goals.

Whether you are a seasoned investor or just getting started, ETFs give you the flexibility to build a strategy that fits your goals, your preferences and your level of involvement.

Remember, your portfolio can be just as flexible as your grill menu.

Enjoy the rest of summer, stay invested and stay well diversified with ETFs.

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up and investors may not get back the full amount invested. Generally, those investments offering potential for higher returns are accompanied by a higher degree of risk. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors or general market conditions. For actively managed ETFs, there is no guarantee that the manager's investment decisions will produce the desired results.

ETFs and ETPs (exchange-traded products) trade like stocks, fluctuate in market value and may trade above or below the ETF's or ETP's net asset value. Brokerage commissions and ETF/ETP expenses will reduce returns. ETF/ETP shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. However, there can be no guarantee that an active trading market for ETF/ETP shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs/ETPs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.

Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

The first half of 2025 was spent waiting for the Federal Reserve to resume dropping its benchmark interest rate.

Yes, following a full point-reduction to the federal funds rate's target range across three cuts in 2024, the Federal Open Market Committee (FOMC) signaled a slower pace of play earlier this year.

But, under pressure from President Donald Trump and the White House as well as in response to moderating inflation and a weakening labor market, lower interest rates became a theme in the second half of the year.

We're awaiting a third straight rate cut of 25 basis points at the December Fed meeting.

But there's still time for tactical investors to get in front of lower interest rates by entering a number of exchange-traded funds (ETFs) that, for one reason or another, would benefit from another rate cut this year and a couple more in 2026.

Dividend yields represent the trailing 12-month yield, which is a standard measure for equity funds. SEC yields reflect the interest earned after deducting fund expenses for the most recent 30-day period and are a standard measure for bond and preferred-stock funds.

Data is as of December 8.

Will rates fall? Perhaps this fall.

As most Wall Street economists expected, the Fed responded to a slowing labor market with a quarter-point cut to the target range for the federal funds rate in September. The Fed followed up in October by trimming its benchmark by another 25 basis points.

Although market participants are optimistic about another 0.25% move, they wonder whether it means more cuts in 2026.

"The uncertainty of the nature of the Fed cut expected this Wednesday has put the market in a wait-and-see mode," Louis Navellier of Navellier & Associates observes.

Investors, traders and speculators are almost 90% certain of a December rate cut, but that probability is "clouded by the expectations that the cut will be highly contentious internally and whether the rhetoric will be hawkish enough to bring serious doubts about any further cuts until Chairman Powell is replaced in May," Navellier notes.

Absence "of complete economic data due to the catch-up from the extended government shutdown also makes reaching conclusions difficult."

As of December 8, CME FedWatch, which uses 30-day federal funds futures prices to track the probabilities of changes to the central bank's benchmark rate, projects an 88% chance we'll see another 25-basis-point rate cut in December, with probabilities of 68% and 35% for follow-up cuts in January and March.

All this is just projection and analysis, with some price action involved. Meanwhile, forecasts for the next Fed meeting are clouded by that government-shutdown-created data gap.

Still, if you believe "full employment" will take precedent over "price stability," and you're a bit more active with your portfolio than the average buy-and-holder, there are a few ETFs you can consider buying in advance of more rate cuts.

Vanguard Short-Term Bond ETF

• Assets under management: $39.2 billion
• SEC yield: 3.8%
• Expenses: 0.03%, or $3 annually for every $10,000 invested

Normally, such a list would be chock full of bond ETFs of varying lengths because as rates on new bonds decline, prices of existing bonds generally improve.

While the fed funds rate has more of a direct impact on short-term interest rates, long-term rates (over time) also tend to move in the same direction more often than not.

But we're only listing two, as this time might be different. Here's what David Payne, economist with The Kiplinger Letter, says in his latest interest-rate outlook:

"Bond investors' concern that an economic slowdown looms is shown by the fact that current one- to seven-year Treasury notes have lower yields than short-term Treasury bills, which mature in a few months. But 20- and 30-year bond yields have picked up more than the 10-year yield has in recent months, indicating that both long-term inflation and government deficits are a rising concern among bond traders."

For now, we're likely safer looking at the short end of the yield curve, even if it won't give us the kind of wiggle longer-term bonds theoretically could.

The Vanguard Short-Term Bond ETF (BSV) is a dirt-cheap index fund that provides extremely broad exposure to investment-grade short-term debt.

The fund invests in more than 2,900 bonds with an average maturity of from one to five years; the portfolio's current average effective maturity is a hair below three years.

The lion's share (70%) of BSV's assets are invested in U.S. Treasuries or government agency debt, with another 25% in domestic corporate issues, and the remainder in dollar-denominated international bonds.

Duration, a measure of risk, is a low 2.6 years. That effectively means that for every one-percentage-point increase in market interest rates, BSV would decline by 2.6%, at least in the short term. That works the other way, though, as a one-point decline in rates would lift BSV by 2.6%.

That's not nearly as much motion as you'd get from a longer-term bond fund, but as mentioned above, longer-term bond funds might not react much to a September rate cut; BSV would appear to provide a better chance of enjoying at least some upside.

It's also a fairly stable fund, given its high quality and short duration, and it yields a respectable 3.8% right now.

Learn more about BSV at the Vanguard provider site.

Fidelity Total Bond ETF

• Assets under management: $22.9 billion
• SEC yield: 4.5%
• Expenses: 0.36%

If you wanted to be more aggressive without completely selling out to the long end of the yield curve, consider an intermediate-term bond ETF such as the Fidelity Total Bond ETF (FBND), one of two products on this list that merit inclusion in the Kip ETF 20.

More specifically, if one cares about Morningstar terminology (and we do), FBND is an intermediate core-plus bond fund.

These funds will mostly own investment-grade U.S. debt, including government, corporate and securitized debt. But they have more flexibility than core funds to look at other types of bonds, including corporate high-yield ("junk"), emerging-markets debt, bank loans and more.

The "intermediate" part refers to a duration of from 3.5 to six years; if duration isn't available, average effective maturities of four to 10 years.

In short, these funds are more aggressive than the likes of BSV in several ways.

The Fidelity Total Bond ETF's eight-manager team has compiled a portfolio of more than 4,400 predominantly investment-grade bonds.

Despite a pretty long leash, FBND is largely sticking to the "core" categories right now, with a roughly even three-way split of securitized, corporate and government debt (and a sprinkling of cash). That's largely investment-grade, but not entirely. A little more than 10% of those bonds have junk ratings.

An average weighted maturity of almost nine years and a duration of six years both put FBND on the longer end of the intermediate-term spectrum. If longer-term bonds don't respond to a Fed rate cut, FBND might not do much … but if they do, it has a lot more upside potential than BSV.

At least you're getting paid 4.5% annually to wait and see.

Learn more about FBND at the Fidelity provider site.

Schwab U.S. Dividend Equity ETF

• Assets under management: $71.2 billion
• Dividend yield: 3.8%
• Expenses: 0.06%

Another market principle is that the lower interest rates (and thus bond yields) go, the more attractive dividend stocks look.

If your primary concern is income, a 4% yielding dividend stock (which can be susceptible to market volatility) won't look nearly as good as the 4% that you can get out of even short-term bonds right now, and they tend to be a lot less volatile.

But if all interest rates head lower, and even if just short-term rates decline, the Schwab U.S. Dividend Equity ETF (SCHD) and its nearly 4% yield will look increasingly tempting.

SCHD tracks the Dow Jones U.S. Dividend 100 Index, a group of 100 dividend stocks that have paid a cash distribution for at least 10 straight years. Components are also screened by metrics including yield, dividend growth, return on equity and free cash flow vs total debt (free cash flow is the money left after operating expenses and spending on assets).

Said differently, SCHD prioritizes above-average but sustainable dividends.

This float-adjusted market cap-weighted portfolio is populated with big, value-oriented blue chip stocks, with top holdings, including the likes of Merck (MRK), Chevron (CVX) and Cisco Systems (CSCO).

Learn more about SCHD at the Schwab provider site.

Vanguard Real Estate ETF

• Assets under management: $33.7 billion
• Dividend yield: 3.5%
• Expenses: 0.13%

Another area of the equity market that benefits from declining interest rates is the real estate sector. Real estate investment trusts (REITs) participate in the same competition for attention from income investors.

The lower bond yields are, the more attractive REITs' traditionally high yields are. And REITs tend to do a lot of borrowing for activities such as acquiring more real estate; higher rates raise their cost of borrowing, while lower rates reduce it.

REIT funds such as the Vanguard Real Estate ETF (VNQ) could be appealing buys ahead of a Fed interest-rate cut.

VNQ is an index ETF that currently holds more than 150 REITs representing a broad swath of U.S. (and a little international) real estate. Exposure includes retail, residential and office property as well as data centers, warehouses, self-storage units, even driving ranges.

It's also market cap-weighted, so top holdings are real estate giants, including communications infrastructure play American Tower (AMT), data services REIT Digital Realty Trust (DLR) and mall specialist Simon Property Group (SPG).

Real estate tends to be one of the highest-yielding (if not the highest) market sectors, but VNQ tends to deliver more income than most other big-name REIT ETFs. Currently, it sports a 3.5% yield.

That, and longevity, are among the reasons VNQ is the largest REIT ETF despite having a slightly more expensive annual fee than many of the other big providers' real estate offerings.

Learn more about VNQ at the Vanguard provider site.

Avantis U.S. Small Cap Value ETF

• Assets under management: $19.8 billion
• Dividend yield: 1.7%
• Expenses: 0.25%

Some small-cap value bulls are optimistic that the strategy's fate is turning around. Although rates account for some of the tale, they're not the whole story.

Small-cap companies in general are sensitive to interest rates, in part "because of difficulty developing new banking relationships and difficulty accessing alternative sources of financing," says Goldman Sachs Research.

That's also because smaller companies sometimes have to rely on shorter-term, floating-rate debt.

Higher interest rates constrain small caps' finances, while lower interest rates give them breathing room. Unsurprisingly, historical performance shows that small companies tend to do much better following a rate cut.

Aberdeen Investments research shows that, on average, small caps have delivered a total return of 26.6% in the 12 months following a Fed rate cut vs 22.4% for midcaps and just 15.6% for large-cap stocks.

But small caps are also as sweetly priced as you could want right now. The gap in forward price-to-earnings (P/E) between large and small caps is greater than it has been since the dot-com bubble was bursting.

That also marked the start of a roughly seven-year period of small caps racing past large caps, and during that time, small-cap value more than doubled up its growth cohorts.

While there are numerous inexpensive indexed options out there, you might want to consider the actively managed Avantis U.S. Small Cap Value ETF (AVUV).

A five-manager team looks for small companies with high profitability ratios that trade at attractive valuations. This is a large portfolio of nearly 800 companies such as aircraft lessor Air Lease (AL) and discount store chain Five Below (FIVE).

Avantis, a division of American Century Investments, isn't exactly a household name. Its $90 billion in assets under management (AUM) across all products wouldn't crack the top 25 of individual ETFs by assets.

However, AVUV is the second-largest small-cap value ETF by assets, at nearly $20 billion, and accounts for roughly 22% of Avantis' AUM!

Why? Because so far, it has worked. This small-cap ETF started trading in the second half of 2019.

Since then, it has delivered a trailing five-year return that's better than 94% of its Morningstar category peers. And it earned a Silver Medalist rating because it "diversifies well and balances its exposure to the quality and value risk factors."

That, according to Morningstar Senior Analyst Daniel Sotiroff, "should keep the fund competitive in most market environments."

Learn more about AVUV at the Avantis provider site.

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Concerns that a budget bill could add trillions to the country's debt and worries about the inflationary effects of tariffs pushed bond yields higher. (Bond prices and yields move in opposite directions.) A downgrade in U.S. credit from Moody's Ratings didn't help.

With this in mind, we decided it's a good time to check in with our favorite bond exchange-traded funds (ETFs).

As a group, the six bond funds in the Kiplinger ETF 20 have returned 5.5% over the past 12 months through the end of May, in line with the 5.5% gain in the Bloomberg U.S. Aggregate Bond Index.

All but one bond ETF beat the index. The Invesco Senior Loan ETF (BKLN) and the iShares Short Duration Bond Active ETF (NEAR) led the way, followed by the SPDR DoubleLine Total Return Tactical (TOTL), the Invesco BulletShares 2026 Corporate Bond (BSCQ) and the Fidelity Total Bond (FBND) funds.

A unique opportunity in bond ETFs

Trailing the Agg and the rest of the Kip ETF 20 bond funds over the past year was the Vanguard Tax-Exempt Bond (VTEB) fund. But it may be time to give munis a closer look.

The municipal bond market has been rocked since the start of the year, but for reasons that are more technical than fundamental.

A notable increase in muni-bond issuance in the first quarter of 2025, combined with reduced demand, was a drag on the relative performance of the sector, which consists mostly of securities rated double-A or better.

"Municipal bond fundamentals remain strong, with record-high state rainy-day funds and robust balance sheets," says Paul Malloy, head of municipals at Vanguard. Meanwhile, municipal revenue sources are largely insulated from tariff and trade risks.

"This unique market condition offers high-earning investors a chance to capitalize on attractive yields while benefiting from the stability and resilience of municipal bonds," says Malloy.

For investors in the 24% tax bracket, the fund's 3.9% yield is equivalent to more than 5.1%.

This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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Global tension are high heading into 2026. Russia's invasion of Ukraine has dragged on for nearly four years in a grinding war of attrition. And while Israel and Hamas agreed to a U.S.-brokered ceasefire in Gaza, friction remains.

Governments around the world have watched and acted. In late June, NATO, a military alliance of 32 countries including the U.S., Canada and most of Europe, held a periodic summit in The Hague.

Member nations agreed to significantly boost defense spending targets from the traditional 2% of gross domestic product (GDP) to 5%.

This was likely influenced by ongoing concerns about Russian President Vladimir Putin's expansionist ambitions, alongside renewed pressure from a second Trump administration that has been vocally critical about America's outsized role in NATO.

Together, these developments have created strong tailwinds for aerospace and defense ETFs, which attracted significant inflows in 2024 and 2025.

Some investors are using these exchange-traded funds as a hedge against geopolitical instability, while others see them as a way to benefit from a surge in global military spending.

But not all aerospace and defense ETFs are created equal. Before you invest, it's important to understand how each fund selects and weights its holdings, because those choices can drive very different performance outcomes.

What goes into an aerospace and defense ETF?

Aerospace and defense ETFs might sound like a narrow niche, but their holdings can be surprisingly diverse. These funds aren't just filled with companies that make fighter jets and missiles, though those are certainly represented.

The industry includes a wide mix of manufacturers, suppliers, service providers and contractors that support defense and aerospace operations in different ways.

A large portion of most defense ETFs is typically allocated to major prime contractors, which are the big companies that build complete weapons systems and platforms. The "Big 5" include:

Lockheed Martin (LMT), maker of the F-35 fighter jet, Black Hawk helicopters and HIMARS rocket systems.

RTX (RTX), formerly Raytheon, produces the Patriot missile defense system, as well as the Tomahawk cruise missile.

Northrop Grumman (NOC) is responsible for the B-21 Raider stealth bomber and various missile defense systems.

Boeing (BA) supplies military aircraft such as the F/A-18 Super Hornet and the AH-64 Apache attack helicopter.

General Dynamics (GD) builds Abrams tanks, Stryker armored vehicles and Virginia-class nuclear submarines.

These companies dominate U.S. defense procurement and lobbying efforts. They design and deliver the complete platforms that make up much of modern militaries' arsenals.

But many other aerospace and defense firms play a more specialized role, supplying key components rather than full systems. For example:

GE Aerospace (GE) primarily manufactures jet engines for both military and commercial aircraft.

L3Harris Technologies (LHX) focuses on defense electronics, communications systems and space sensors.

TransDigm Group (TDG) supplies highly engineered aircraft components such as actuators, ignition systems and cockpit controls used in both military and commercial platforms.

Some major names in the space aren't pure plays. They might be large industrial conglomerates with a significant, but not exclusive, focus on defense.

Honeywell International (HON) is a good example. While it provides avionics, navigation and surveillance systems to the military, it also has major operations in industrial automation and building technologies.

Aerospace and defense exposure isn't limited to the U.S., either. Europe is in the midst of a rearmament push, and many regional contractors are drawing more investor attention:

Rheinmetall (Germany) makes tanks, artillery and ammunition systems.

Leonardo (Italy) supplies helicopters, aircraft and electronics.

Saab (Sweden) produces the Gripen fighter jet and radar systems.

Dassault Aviation (France) builds the Rafale multirole combat aircraft.

BAE Systems (U.K.) offers a wide portfolio spanning land, sea, air and cyber.

Some aerospace and defense ETFs might cast the net even wider by including cybersecurity, surveillance and intelligence contractors. These firms don't manufacture physical weapons, but play an increasingly vital role in modern defense:

Booz Allen Hamilton (BAH) provides consulting and technology solutions to the Pentagon and intelligence agencies.

Palantir Technologies (PLTR) develops data analytics platforms used for military intelligence, targeting and situational awareness.

Depending on the ETF, the definition of "defense" can stretch beyond tanks and aircraft to include the digital backbone of national security. That's why it pays to look closely at what each fund holds.

How we chose the best aerospace and defense ETFs

We started by excluding leveraged and inverse ETFs, which are designed for short-term trading and aren't suitable for long-term investors. We focused on long-only funds that offer unleveraged exposure to the aerospace and defense sector.

To ensure cost efficiency and ease of trading, we capped expense ratios at 0.60% and required a 30-day median bid-ask spread below 0.25%. We also set a minimum $500 million in assets under management (AUM) to reduce the risk of fund closure and ensure sufficient scale and investor interest.

These screens helped us identify funds that are reasonably priced, liquid and built to last. These are key attributes for anyone looking to invest in the long-term trends driving defense and aerospace spending.

iShares U.S. Aerospace & Defense ETF

• Assets under management: $12.0 billion
• Expense ratio: 0.38%
• 30-day median bid-ask spread: 0.07%

The iShares U.S. Aerospace & Defense ETF (ITA) has one of the longest track records in the category, having launched in May 2006.

It tracks the Dow Jones U.S. Select Aerospace & Defense Index and holds a concentrated portfolio of 38 domestic companies. Due to its size and longevity, it's often considered the default option for many investors in this space.

However, ITA is weighted by market cap, which creates notable imbalances. GE Aerospace makes up 22.2% of the portfolio, followed by RTX at 16% and Dow Jones stock Boeing at 7.4%.

After that, allocations drop off quickly, with Howmet Aerospace (HWM) being the fourth-largest holding at just 4.8%.

Learn more about ITA at the iShares provider site.

Invesco Aerospace & Defense ETF

• Assets under management: $6.6 billion
• Expense ratio: 0.58%
• 30-day median bid-ask spread: 0.06%

The Invesco Aerospace & Defense ETF (PPA) tracks the SPADE Defense Index, a bespoke benchmark developed by a defense-focused analyst firm rather than a major index provider.

While the index has historical data going back to December 1997, PPA itself launched in October 2005, giving it a slightly longer track record than ITA.

PPA uses a modified market-cap weighting approach that limits the influence of the largest companies. This helps avoid overexposure to diversified firms in which defense is just one business segment, resulting in a more balanced portfolio.

While it shares many holdings with ITA, it is notably less top-heavy.

Learn more about PPA at the Invesco provider site.

SPDR S&P Aerospace & Defense ETF

• Assets under management: $3.6 billion
• Expense ratio: 0.35%
• 30-day median bid-ask spread: 0.06%

The SPDR S&P Aerospace & Defense ETF (XAR) tracks the S&P Aerospace & Defense Select Industry Index.

Instead of being weighted by market cap, XAR's benchmark uses an equal-weight methodology that gives each holding roughly the same allocation regardless of if they're a large-cap stock or a small-cap stock. This reduces concentration risk and prevents the biggest contractors from dominating the portfolio.

XAR currently holds 40 companies, with the top positions reflecting recent outperformers between rebalancing cycles.

Its equal weighting also increases exposure to small- and mid-cap stocks, which tend to be more concentrated in the aerospace segment than pure defense.

Learn more about XAR at the SPDR provider site.

Global X Defense Tech ETF

• Assets under management: $5.0 billion
• Expense ratio: 0.50%
• 30-day median bid-ask spread: 0.06%

The Global X Defense Tech ETF (SHLD) launched in September 2023 and quickly gained traction, posting a 66% annualized return since inception as of September 30, 2025.

SHLD tracks the proprietary Global X Defense Tech Index, which takes a broader approach than traditional aerospace-heavy ETFs such as ITA, PPA or XAR. Rather, it focuses more on military hardware and defense technology than on commercial aerospace.

Common holdings with ITA, PPA and XAR include names such as Lockheed Martin, RTX and General Dynamics. But SHLD expands beyond the U.S., with exposure to European defense firms such as Leonardo, Rheinmetall and Thales.

Notably, it has a strong focus on intelligence, with Palantir Technologies coming in as its third-largest holding.

Learn more about SHLD at the Global X provider site.

Select STOXX Europe Aerospace & Defense ETF

• Assets under management: $1.1 billion
• Expense ratio: 0.50%
• 30-day median bid-ask spread: 0.14%

The Select STOXX Europe Aerospace & Defense ETF (EUAD) offers an internationally focused alternative to U.S.-centric funds such as ITA, PPA or XAR.

It tracks the STOXX Europe Total Market Aerospace & Defense Index and includes only European-listed companies or American depositary receipts (ADRs) that generate at least 50% of their revenue from aerospace and defense.

EUAD is filled with top European stocks including Airbus, Rheinmetall, BAE Systems, Thales and Leonardo. Rolls-Royce is also among its holdings, which, in addition to its automotive legacy, is a major manufacturer of aircraft engines.

Through October 31, the fund is up 83% year to date, driven by strong inflows amid growing interest in Europe's rearmament efforts.

Learn more about EUAD at the STOXX provider site.

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First, a little context. After peaking in February, the S&P 500 Index plunged 19% before recovering some in early April.

By the end of April, the index was down 9% from its peak on February 19. The 11 U.S. stock funds in the Kip ETF 20 – our favorite exchange-traded funds – performed in line with the benchmark with an average loss of 9%.

A focus on dividends and quality helped. The Schwab U.S. Dividend Equity ETF (SCHD) and the Vanguard Dividend Appreciation ETF (VIG) held up best, declining 7.5% and 6.4%, respectively, through April from the market peak.

The JPMorgan U.S. Quality Factor ETF (JQUA) was not far behind, with a 7.3% loss. It focuses on stocks that pass certain quality and profitability measures.

Funds that emphasize smaller companies and tech stocks fared worse. The iShares Core S&P Mid-Cap ETF (IJH) and the iShares Core S&P Small-Cap ETF (IJR) lost 10.8% and 14.3%, respectively.

Nipping at their heels were the Technology Select Sector SPDR ETF (XLK), which holds 65 information technology stocks, with a 13.0% loss, and the SPDR S&P Kensho New Economies Composite ETF (KOMP), which declined 13.6%. Tech stocks make up 35% of that portfolio, which focuses on innovative companies.

But one fund turned its fortunes around. After lagging the S&P 500 for much of the past decade, the Invesco S&P 500 Equal Weight ETF (RSP) weathered the swoon far better than any other U.S. stock fund in the Kip ETF 20, with a 7.0% loss.

The fund holds shares in every member of the S&P 500 in equal proportions, rather than weighting them by market value. That approach helped to lessen the impact of losses in some of the biggest S&P 500 firms, including Tesla (TSLA), Nvidia (NVDA) and Apple (AAPL).

Meanwhile, the equal-weighting enhanced the impact of gains in smaller companies in the index, including software company Palantir Technologies (PLTR), CVS Health (CVS) and goldmining company Newmont (NEM).

This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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The most popular flavor of options ETFs, especially since the 2022 bear market, are covered-call ETFs. These funds come in many forms, with different underlying assets and call-selling strategies. But most offer a similar trade-off: higher income yields in exchange for limited capital upside.

There's still a lot of nuance under the hood, though, so before you chase headline yields, make sure you understand what you're really buying.

How do covered-call ETFs work?

It's easier to understand how covered calls work when you think of them by their alternate name: "buy-write." The setup involves owning 100 shares of an asset and then selling one call option against those shares. Selling the call option obligates you to sell your shares at a specific price (the "strike") if the buyer chooses to exercise the contract.

In return, you pocket cash upfront in the form of a premium paid by the buyer. The amount of premium you collect mostly depends on three things:

• Moneyness: How close the strike price is to the asset's current price
• Time to expiry: Longer-dated options tend to be worth more
• Underlying asset volatility: More volatility generally means higher premiums

That income adds a cushion in bear markets and can help you outperform when markets move sideways. But it also means your returns could lag in a strong bull market because your upside is capped.

Covered-call ETFs just execute some version of this strategy at scale. They do it for you in exchange for a management fee. But there's a lot of variation within this niche.

For example, you'll find covered-call ETFs that only sell calls on individual stocks, while others use broad indexes like the S&P 500 or Nasdaq-100. Some stick to one-month expiries, while others write so-called 0DTE (zero days to expiry) options.

Some funds write calls on 100% of the portfolio to maximize income, while others sell on just a portion to preserve some upside.

Other strategies include selling at-the-money (ATM) options for the biggest premiums but zero upside or using out-of-the-money (OTM) strikes to allow a bit of capital growth.

These approaches aren't mutually exclusive, either. There's almost an endless mix of assets, strike selection, expiries and coverage ratios.

But remember, there's no free lunch here. Covered-call ETFs are just another way to realize returns. They're better suited for investors who value income over price appreciation and who can manage or tolerate the tax drag that often comes with it.

How we chose the best covered-call ETFs to buy

We started by screening out ETFs using a synthetic buy-write setup, like pairing a long call with a short put instead of holding the underlying stocks outright. These synthetic structures can introduce counterparty risk and execution complexity.

We excluded covered-call ETFs that only track individual stocks. These products lack diversification and don't offer the broader market exposure many income-focused investors want in a core position.

We gave added weight to covered-call ETFs that delivered attractive risk-adjusted returns compared to traditional index ETFs.

Since covered-call strategies typically sacrifice upside for income, we prioritized funds that proved they could still hold their own in choppy markets where this approach tends to shine.

Then we applied our standard filters. We capped fees at 0.7% to ensure cost efficiency and focused on reputability, favoring ETFs with at least $1 billion in assets under management and those backed by experienced options-focused firms or large, established asset managers.

JPMorgan Equity Premium Income ETF

• Assets under management: $40.7 billion
• Expense ratio: 0.35%
• Dividend yield: 8.3%

The JPMorgan Equity Premium Income ETF (JEPI) actively selects a portfolio of defensive, low-volatility U.S. equities.

It then sells out-of-the-money S&P 500 call options using equity-linked notes (ELNs), structured instruments that combine a bond with an embedded option. This setup gives investors the potential for index-level option premiums while holding a lower-volatility stock basket.

JEPI has historically delivered strong risk-adjusted returns, though it's worth noting that distributions from ELNs are taxed as ordinary income, which may reduce tax efficiency for some investors.

Learn more about JEPI at the JPMorgan provider site.

JPMorgan Nasdaq Equity Premium Income ETF

• Assets under management: $32.2 billion
• Expense ratio: 0.35%
• Dividend yield: 10.1%

The JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) is the more aggressive counterpart to JEPI, offering exposure to a portfolio that closely mirrors the Nasdaq-100, with a heavy tilt toward the Magnificent Seven stocks.

Like JEPI, it uses ELNs to sell out-of-the-money call options on the index. Because the Nasdaq is typically more volatile, JEPQ has historically delivered higher levels of income. It shares the same expense ratio as JEPI and faces similar tax efficiency challenges, with distributions from ELNs taxed as ordinary income.

Learn more about JEPQ at the JPMorgan provider site.

NEOS S&P 500 High Income ETF

• Assets under management: $6.0 billion
• Expense ratio: 0.68%
• Dividend yield: 11.6%

The NEOS S&P 500 High Income ETF (SPYI) fully replicates the S&P 500 by holding the individual stocks in the index. It then opportunistically sells call options on the S&P 500 Index (SPX) using a data-driven overlay strategy.

A key benefit of SPYI is its tax efficiency. The SPX options it sells are classified as Section 1256 contracts, which are taxed at a blended 60/40 rate: 60% long-term and 40% short-term capital gains.

On top of that, the fund actively tax-loss harvests, using losses to offset gains. This strategy can increase the portion of distributions classified as return of capital (RoC), which is not taxed in the year received and instead lowers the investor's cost basis.

Learn more about SPYI at the NEOS provider site.

NEOS Nasdaq 100 High Income ETF

• Assets under management: $6.0 billion
• Expense ratio: 0.68%
• Dividend yield: 13.4%

The NEOS Nasdaq 100 High Income ETF (QQQI) mirrors the strategy used by SPYI. It holds all the individual stocks in the Nasdaq-100 and Nasdaq-100 Index (NDX) call options.

As with SPYI, these options are taxed under Section 1256, and the fund actively tax-loss harvests, helping boost the portion of distributions classified as RoC.

QQQI's yield is notably higher, thanks to the higher volatility of the Nasdaq-100. More volatility means richer option premiums, similar to how JEPQ compares to JEPI.

Learn more about QQQI at the NEOS provider site.

Amplify CWP Enhanced Dividend Income ETF

• Assets under management: $5.5 billion
• Expense ratio: 0.56%
• Dividend yield: 4.5%

The Amplify CWP Enhanced Dividend Income ETF (DIVO) is a highly active covered-call fund that has earned a 5-star Morningstar rating, placing it among the top performers in the large-cap value category.

The fund starts with a concentrated portfolio of 20 to 25 blue chip stocks, screened for strong fundamentals like earnings and dividend growth, management quality, cash flow and return on equity.

DIVO then selectively sells call options on individual stocks in the portfolio based on factors like volatility and earnings momentum.

It actively manages coverage ratios, strike prices and expiry dates, giving it more flexibility to capture upside. While its yield is lower than many index-based covered-call ETFs, DIVO has historically delivered strong total returns.

Learn more about DIVO at the Amplify provider site.

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That's where Fidelity shines. It employs "smart beta" approaches and skilled investment managers who conduct in-depth research on sectors or investment themes to identify the best investments currently performing well.

Whether you're looking for plain passive exchange-traded funds or aggressive options designed for quick returns, the following list of five of the best Fidelity ETFs likely has something for you and your investing goals.

To find the top Fidelity ETFs to buy, we focused on funds with assets under management of at least $4 billion, indicating they are well-established. We also included funds from several asset classes with low expense ratios.

Data is as of October 7.

Fidelity Wise Origin Bitcoin Fund

• Assets under management: $25.2 billion
• Expenses: 0.25%, or $25 annually for every $10,000 invested

The Fidelity Wise Origin Bitcoin Fund (FBTC) is one of Fidelity's newest ETF offerings, launched in January 2024.

FBTC is nevertheless one of the most popular options under the firm's umbrella. That's thanks to steady interest in crypto markets and bitcoin, in particular, which is the key underlying asset of this Fidelity ETF.

With 100% of assets invested in bitcoin, FBTC provides a simple and effective way to get exposure to the most popular cryptocurrency.

And with bitcoin having nearly doubled in the last 12 months and up 32% for the year to date, that makes this one of the best Fidelity ETFs to consider for those looking to broaden their exposure beyond typical blue chip stocks.

Learn more about FBTC at the Fidelity provider site.

Fidelity Total Bond ETF

• Assets under management: $21.4 billion
• Expenses: 0.36%

The Fidelity Total Bond ETF (FBND) is another very popular and well-established Fidelity fund due it its lower risk profile.

FBND is an actively managed bond ETF that holds some 4,500 different debt securities and yields 4.5% at present. This is nearly four times the yield of the S&P 500 Index.

The Fidelity ETF holds it all, from rock-solid bonds issued by the U.S. Treasury to a smattering of higher-risk but higher-return "junk bonds" from subpar companies.

About a third of FBND's assets are in government bonds to provide a firm foundation, but another third of the portfolio is allocated to corporate bonds, some of which are loans to distressed companies that offer super-sized yields.

All in all, it is a diversified Fidelity fund that truly gives you exposure to the entire bond market.

Learn more about FBND at the Fidelity provider site.

Fidelity MSCI Information Technology Index ETF

• Assets under management: $16.4 billion
• Expenses: 0.084%

The Fidelity MSCI Information Technology Index ETF (FTEC) is a passively managed sector fund that includes roughly 280 tech stocks.

That allows investors to look deep into the high-growth sector and gain exposure to a variety of companies, from trillion-dollar tech companies to smaller software firms.

FTEC is weighted by market value, so almost 60% of its assets are in the top 10 stocks alone – a lineup that includes tech giants Nvidia (NVDA), Apple (AAPL) and Microsoft (MSFT).

But that could be a feature, not a bug, for those who consider these leaders a strong foundation for this tech ETF to smooth out the volatility that smaller technology names might experience along the way.

Learn more about FTEC at the Fidelity provider site.

Fidelity High Dividend ETF

• Assets under management: $7.2 billion
• Expenses: 0.16%

If you're interested in yield but would prefer dividend stocks to bonds, the Fidelity High Dividend ETF (FDVV) might be worth a closer look.

This fund holds a focused list of 120 or so stocks, but it's one of the best Fidelity ETFs because of its selectivity.

Specifically, FDVV zeroes in on the very best dividend-paying stocks based on consistency of distributions, a strong history of payouts and expectations that they'll continue to grow those dividends going forward.

Top holdings at present include tech giant Microsoft, mega-bank JPMorgan Chase (JPM) and tobacco icon Philip Morris International (PM) – a who's who list of reliable dividend payers.

Learn more about FDVV at the Fidelity provider site.

Fidelity Enhanced Large Cap Core ETF

• Assets under management: $5.4 billion
• Expenses: 0.18%

As its name implies, the Fidelity Enhanced Large Cap Core ETF (FELC) focuses on core large-cap holdings such as Apple, Berkshire Hathaway (BRK.B) and Meta Platforms (META).

The fund is more selective than your typical S&P 500 ETF, however, with about 210 holdings.

The large-cap stocks are selected based on multifactor statistical models that prioritize fundamental characteristics such as profit and sales growth, as well as valuation metrics.

As is typical of Fidelity, there's no way to know the "secret sauce" for certain. However, for those looking to branch out from vanilla index funds, this is one of the best Fidelity ETFs to consider.

Learn more about FELC at the Fidelity provider site.

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Both the ETF and the index are weighted by market value and include the same companies – the 69 tech stocks that are members of the S&P 500 stock index. So, what gives?

Weighting matters when it comes to fund returns

The weighting of stocks in the ETF varies from their weighting in the index, thanks to a rule in the Investment Company Act, enacted in 1940, that governs how mutual funds and ETFs should maintain diversification.

"The index doesn't have to adhere to the 1940 Investment Company Act, but the fund does," says Matthew Bartolini, head of ETF research in the Americas for State Street Global Advisors.

The diversification rules are designed to avoid risk from stock concentration in funds.

Chiefly, the rules prescribe that no single stock can make up more than 25% of any given fund's assets and that the sum of any stocks in the fund with a 5% or greater stake must add up to less than 50%.

Ergo, Apple (AAPL), Microsoft (MSFT) and Nvidia (NVDA) – top holdings in both the Technology Select Sector ETF and the Information Technology index – make up 41% of the ETF but account for roughly 60% of the Info Tech index.

The variation in the weighting of holdings had little impact on relative returns in 2022 and 2023, when the ETF and the Info Tech index posted similar gains.

But 2024 was different, thanks to mega-size gains in a handful of mega-size companies. The ETF logged a 21.6% gain that calendar year; the Info Tech index, 36.6%.

"It has been an anomalous market," says Bartolini. Of course, many of those mega-size firms have given back some of those gains recently, and that may mean the ETF will close the gap in relative performance.

The Technology Select Sector SPDR is a solid tech fund. The ETF's 10-year 17.4% annualized return beat 89% of its peers.

This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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These funds, also called buffered ETFs, invest in options linked to a broad benchmark in order to provide a specific amount of downside protection – 9%, 10%, 15%, 20% or even 100% – over a distinct time frame called the outcome period, typically one year (though three-month funds are now popular).

How much you forfeit in gains depends on the amount of protection the fund offers. The bigger the cushion, the smaller the potential gain.

A recently launched PGIM fund tied to the S&P 500 Index with 100% protection on losses over one year had a 7% cap on upside returns, while an Allianz ETF with a 10% shield sported a cap of roughly 16%, net of fees.

It's important to find a fund that aligns with your investment objectives and risk tolerance, says Mike Loukas, chief executive of the firm behind TrueShares defined-outcome funds.

To get you started, we've highlighted a few buffered ETFs that may work for investors with certain risk tolerances. Use these suggestions to start your own research.

How to find the best buffered ETFs for you

Bear in mind that the strategies, which charge average annual fees of 0.72%, are structured around specific outcome periods because of the options they buy, but the funds themselves are designed to be buy-and-hold investments.

When a fund's outcome period expires, the fund managers reset it by buying new options for the next cycle.

That said, the timing of purchases should be deliberate. To take advantage of a fund's full downside buffer, it's best to buy shares in a defined-outcome fund a day before the start of the period (the day the fund resets).

"I recommend buying on the reset day, an hour or so before the market closes,” says Beverly Hills, California, adviser Stuart Chaussee. Remember, the advertised protection and cap on gains only apply over the full outcome period.

And note that the cap on gains will likely vary from one outcome period to the next because it is based on options prices at the start of the period, which fluctuate.

For conservative investors: A 100% buffered fund protects against a colossal stock market loss over a one-year period. And if the market doesn't falter, you might do better than a money market fund.

The current cap on gains for the iShares Large Cap Max Buffer (MAXJ), which will reset June 30, is 10.6% for investors who bought at the start of the outcome period last June.

A 20% buffer fund is another option. Chaussee likes the AllianzIM U.S. Large Cap Buffer20 July (JULW). The fund's current cap, which resets July 1, is 11.64%.

For moderate-risk investors: Funds with 15% buffers on declines are the most popular with investors. The July-dated fund of a popular series, the Innovator U.S. Equity Power Buffer ETF July (PJUL), had a cap of 13.7% on gains for investors who bought shares last June. It will reset June 30.

For aggressive investors: Funds with 9% cushions against losses are the obvious choice here. The current cap on the Innovator U.S. Equity Buffer ETF July (BJUL), which will reset on June 30, is 17.4%.

Bullish investors could consider TrueShares Structured Outcome funds. Instead of a cap on gains, investors can expect to reap 73% to 85% of the S&P 500's price return, in exchange for 8% to 12% protection on losses. The TrueShares Structured July-dated fund (JULZ) resets June 30.

This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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That’s the stomping ground of the Dividend Aristocrats index, which includes only companies in the S&P 500 benchmark that have consistently raised dividends for at least 25 consecutive years. Coca-Cola, Procter & Gamble and Walmart are longtime Aristocrats members.

Earlier this year, as part of the benchmark’s annual reconstitution, three new companies were added: insurance company Erie Indemnity, energy provider Eversource Energy, and FactSet Research Systems, which provides financial data and analytic services to investors. There were no deletions.

ProShares S&P 500 Dividend Aristocrats (NOBL)

Exchange-traded fund ProShares S&P 500 Dividend Aristocrats (NOBL, $104, expense ratio 0.35%) is the only U.S. fund that tracks the Dividend Aristocrats index, which currently includes 69 stocks.

The ETF is an antidote of sorts to the concentration of the Magnificent Seven, those tech-related firms that drove market returns for much of the past two years. None of the Seven are Aristocrats, for starters; two of them, Amazon.com and Tesla, don’t even pay a dividend. And the Aristocrats index is equal-weighted — assets are evenly divided by each stock in the index, regardless of market value, dividend yield, or any other measure — and rebalanced quarterly. “It’s a ward against single-stock concentration,” says a spokesperson for S&P Dow Jones Indices. The ETF also yields 2.5%, which is better than the 1.2% yield of a comparable S&P 500 ETF.

Naturally, the absence of the Magnificent Seven in the Aristocrats index has hurt the relative recent returns of the ProShares S&P 500 Dividend Aristocrats ETF. Over the past five years, the ETF’s 11.5% annualized return has lagged the 16.9% average annual gain in the straight-up S&P 500. But over longer hauls, the Aristocrats index has turned in similar returns to the S&P 500, with less volatility.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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The best way to drive inflation out of the system is to hike short-term interest rates. Rates had been sitting close to zero from 2009 to 2022, with the exception of a brief period around 2018. Then the Federal Reserve started to increase rates relentlessly — to more than 5% in just two and a half years. The antidote worked, up to a point. Inflation dropped from 8% in 2022 to 4.1% in 2023 and to 2.9% last year. But the Fed’s target is 2%, and it’s having a tough time getting there.

“American inflation looks increasingly worrying,” said a headline in The Economist in February. President Trump was elected, in part, to stop prices from rising so much, and he has been trying. With Elon Musk, he has cut government employment and programs, but prices don’t react quickly to fiscal changes unless they’re so extreme as to cause a recession — an almost certain way to end inflation with a cure as bad as the disease. The president also wants to drive down energy costs by increasing domestic oil drilling, but oil prices are determined by global forces.

Consumers are concerned, and if they start to think that inflation is rising, they will drive up prices by buying goods ahead of further anticipated increases. The most recent University of Michigan Survey of Consumers found that expectations for inflation over the next year jumped from 3.3% in the previous month’s survey to 4.3% — the highest reading since November 2023 and the second consecutive month of unusually large increases. A big reason is the threat of higher tariffs, which would raise the cost of goods that Americans buy — not just imported goods, but U.S.-made products as well.

Stocks to buy when inflation is rising

So, the fool’s paradise may be ending. Inflation of 3% may not sound like much, but it means that the dollar loses half its value in 24 years; at 4%, it happens in just 18 years. In such a scary environment, is there a way to protect your investments?

The surprise answer is to buy stocks. Consider the worst period of inflation in U.S. history, 1977–81, when the CPI rose at an annualized average rate of 10%. The S&P 500 stock index returned an annualized 8% — a bit below the norm but much higher than returns on long-term U.S. Treasuries, which fell by an average of 1% a year, including interest payments and price declines.

The reason stocks do better is that businesses can counter their own higher costs by raising prices. With inflation averaging about 5% between 2022 and 2024 and the Fed aggressively boosting interest rates, the S&P 500 has produced an annualized return of about 9%.

In an article I wrote in this magazine 19 years ago, with inflation rising, I recommended stocks of companies that appeared to have the power to raise their prices without much resistance. One example was Coca-Cola (KO, $71), which has risen from its price back then of $22 a share while paying a dividend that has jumped by two-thirds (the yield is now 2.9%). I still like Coke; no one can make Coke but Coke. (Securities I like are in bold; prices are as of February 28.)

Other stocks in this category are technology businesses that sell distinctive services by subscription — charging small amounts each month for cloud storage, for example. Apple (AAPL, $242) and Alphabet (GOOGL, $170) are excellent choices.

A non-tech stock that raises prices with impunity is Public Storage (PSA, $304), a real estate investment trust that provides a more mundane kind of storage — for cartons and furniture you don’t want to keep at home. Once you have stored your earthly possessions with Public Storage, moving them to escape a 5% price increase is annoying and onerous. The stock has returned an annualized 11.7% for the past five years.

Another category for inflationary times includes stocks that earn a fairly consistent proportion of a growing pie. Unfortunately, these franchise companies — such as advertising agencies, insurance firms, realtors and ticket sellers — are undergoing upheavals now. Still, there are stocks I like. One is Live Nation Entertainment (LYV, $143), the giant concert producer. Another is Chubb (CB, $285), an insurance company specializing in high-income clients.

How to invest in commodities

Prices of commodities typically rise in inflationary times, but buying leveraged futures contracts comes with severe risks: Transaction fees are high, and a sharp dip can wipe out all of your capital. Also, I have a bias against putting money into things (lumber, pork bellies, gold) rather than people and ideas.

Instead, invest in commodities through natural-resource funds that let you take advantage of human ingenuity as well as the prices of goods rising with inflation. An attractive choice is Vanguard Materials (VAW, $197), with an expense ratio of just 0.09%. The exchange-traded fund’s portfolio is headed by Linde (LIN, $467), a U.K.-based company that sells industrial gases, such as nitrogen and helium, and has a market capitalization (price times shares outstanding) of $221 billion. The stock has doubled in less than five years.

Also consider iShares North American Natural Resources (IGE, $44), an ETF whose portfolio leans heavily toward oil and gas stocks, such as EOG Resources (EOG, $127), but also owns such intriguing companies as CRH (CRH, $103), an Ireland-based producer of building materials such as granite and sandstone.

What about Treasury inflation-protected securities?

What about TIPS, or Treasury inflation-protected securities, which pay a guaranteed real rate of interest plus an inflation kicker that rises with monthly changes in the CPI? At an auction in February, 30-year TIPS were sold carrying a real rate of about 2.4%, the highest since 2001. If inflation averages 3% until maturity, your annual return will exceed 5%.

But TIPS markets are remarkably volatile. In a time of above-average inflation, I would stay away from bonds and bond funds — except those with very short-term holdings. The problem is that when interest rates rise with inflation, the bonds you bought at a lower fixed rate lose their value.

Better to stick with stocks, even though you’ll have to be content with lower returns than in times of stable prices. In fact, one of the best ways to ride out inflation is simply by owning a representative chunk of the market through SPDR Dow Jones Industrial Average (DIA, $438), an ETF known as Diamonds. Many of the Dow’s 30 components are built for inflationary times, among them Nike (NKE, $79) and insurance giant Travelers (TRV, $258). Also, the Dow leans more toward value-oriented stocks, which do better during inflation, than toward growth-focused issues.

Inflation will never be an investor’s friend, but it doesn’t have to be an enemy either. Keep cool and carry a diversified portfolio.

James K. Glassman chairs Glassman Advisory, a public-affairs consulting firm. He does not write about his clients. His most recent book is Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence. He owns none of the securities mentioned here. You can contact him at JKGlassman@gmail.com.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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While not all of these are relevant to markets, some certainly are – and investors clearly agree. Just take a look at the Cboe Volatility Index, or VIX, which surged nearly 20% in February. And in mid-March, the VIX hit its highest level since the August stock market crash.

Often referred to as Wall Street's "fear gauge," the VIX measures expected volatility in the S&P 500 based on options pricing. When uncertainty spikes – whether due to economic concerns, geopolitical events or shifting policy out of Washington – so does the VIX, signaling heightened investor anxiety.

That said, uncertainty doesn't have to mean losses. There are many ways to position a portfolio to manage volatility and even capitalize on it.

Exchange-traded funds (ETFs) provide a convenient way for investors to diversify risk from a second Trump presidency while helping them stay the course. Here's a look at three of the best ETFs for investors to consider.

Harvest higher volatility with covered calls

One highly popular actively managed ETF benefiting from market volatility is the JPMorgan Equity Premium Income ETF (JEPI), which has amassed $39 billion in assets under management.

JEPI's strategy is twofold. First, it selects a subset of S&P 500 stocks with historically lower volatility, aiming to provide a smoother return profile than the broader index.

Second, it enhances income by selling covered calls on the S&P 500 through equity-linked notes (ELNs), which is where heightened volatility comes into play.

Covered calls work by selling the future upside of an asset or index in exchange for an immediate cash premium. The value of this premium depends on several factors, including the time remaining until the call expires, how far the strike price is from the market price, and – critically – the volatility of the underlying asset.

Higher volatility increases option premiums, meaning that in turbulent markets, JEPI's covered call overlay tends to generate more income.

Even better, if markets remain rangebound due to ongoing Trump-related uncertainty and lofty valuations, it bodes well for covered call strategies.

These approaches tend to outperform when stocks trade sideways because they keep collecting premium income without sacrificing as much upside as they would in a strong bull market.

Right now, JEPI is yielding 7.2% on a 30-day SEC basis, with monthly distributions. Despite being actively managed, it remains relatively affordable with a 0.35% expense ratio.

Learn more about JEPI at the J.P. Morgan provider site.

Mitigate sector concentration with equal weighting

The current composition of the S&P 500 Index is heavily skewed, with a roughly 32% allocation to tech stocks. This concentration is the result of the S&P 500's market-cap weighting, where the largest companies receive the highest weightings, combined with a decade of outperformance by technology giants.

For better or worse, Big Tech is now firmly in Washington, D.C.'s crosshairs. Several high-profile tech leaders – including former Amazon (AMZN) CEO Jeff Bezos, Meta Platforms (META) CEO Mark Zuckerberg, Alphabet (GOOGL) CEO Sundar Pichai and Tesla (TSLA) CEO Elon Musk – attended Trump's inauguration, but there's no telling what policies may emerge in the coming years.

Some of these firms have already faced antitrust lawsuits, and regulatory scrutiny could increase further under the current administration should Trump's whims change.

One way to reduce concentration risk while still investing in the S&P 500's basket of stocks is through the Invesco S&P 500 Equal Weight ETF (RSP).

Unlike traditional S&P 500 ETFs that assign higher weightings to the biggest companies, RSP gives each stock an equal 0.2% allocation at periodic rebalances. This prevents any single sector – especially technology – from dominating the portfolio.

While RSP carries a higher expense ratio of 0.2% compared to the lowest-cost S&P 500 ETFs, it has still delivered strong performance. Since its inception in April 2003, RSP has generated an annualized total return (price change plus dividends) of 11.1% – outpacing the S&P 500's 10.4% return.

Learn more about RSP at the Invesco provider site.

Stay the course with low-cost global diversification

Donald Trump is not the first president – and won't be the last – to shake up markets with policy decisions. Past administrations have implemented drastic measures that initially spooked investors, only for the global economy to continue its upward trajectory.

George W. Bush's invasion of Iraq in 2003 led to surging oil prices and geopolitical uncertainty. Barack Obama's Dodd-Frank Act in 2010 introduced sweeping financial regulations that many feared would stifle economic growth.

Yet, in each case, markets adapted, and long-term investors were rewarded for staying the course. Despite short-term volatility, the global stock market has a long history of resilience.

Regardless of U.S. policy shifts, companies worldwide will continue to generate earnings, buy back shares, reinvest in growth and pay dividends. The long-term trend remains intact.

Sometimes, the best move is inaction. Investors who hold a broad global ETF like the Vanguard Total World Stock ETF (VT) – which holds over 9,800 stocks from both developed and emerging markets for a 0.06% expense ratio – might be best served by simply staying patient and tuning out the noise.

If your investment thesis is that the global economy will continue growing over the next several decades, then it shouldn't matter whether the next dominant player is the U.S., China or another country. Long-term investing is about staying the course, regardless of who occupies the White House.

Learn more about VT at the Vanguard provider site.

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Fortunately, investors who stick with large, broadly diversified ETFs generally don’t have to worry about closures, says Daniel Sotiroff, a senior analyst for investment research firm Morningstar. Likewise, limiting investments in risky ETFs to tax-deferred accounts will eliminate closure-related tax headaches.

But anyone who has taken, or is considering taking, fliers on smaller funds, especially ones with risky, niche or region-specific strategies, should limit their stakes and take a few steps to protect themselves, advisers say.

ETF closures: More common than you think

For starters, recognize how frequent ETF closures are. Fund sponsors expect fees, charged as a percentage of assets, to (at least eventually) cover their operating expenses and lead to profits. Consequently, companies tend to shut funds that fail to attract enough assets; consistently underperform and thus are likely to drive investors away; or face challenges such as investing in areas affected by geopolitical conflicts.

In fact, about one-third of all ETFs ever started have shut down, Morningstar calculates. Over the past 10 years, that has added up to 1,550 shuttered funds. In 2024 alone, despite inflows of more than $1 trillion into ETFs overall, 189 closed (an above-average number).

Moreover, many of the closed funds were sponsored by well-established companies, offered attractive-sounding strategies or garnered plenty of popular attention. Fund giant BlackRock liquidated at least 15 funds in 2024, for example, including its four-year-old Future Tech ETF. Despite profiting from holdings such as Nvidia, that fund never attracted significant investments — it charged comparatively high annual fees of 0.88%, and its performance lagged other tech funds. Large fund sponsors such as Global X and Pacer also liquidated China-focused funds in 2024 as that country faced political and financial challenges. Another notable 2024 closure: the Inverse Cramer ETF, which gained media attention (but not many investors or profits) by short selling stocks touted by CNBC personality Jim Cramer.

The rate of ETF closures is likely to accelerate from the current pace, especially if the stock market experiences a prolonged downturn, Sotiroff believes. A record 711 ETFs were launched in 2024, many specializing in risky strategies involving cryptocurrencies or using leverage, which involves borrowing against assets to goose returns. “When times are good, people like to gamble,” says Sotiroff. Fund sponsors “are throwing spaghetti on the wall to see what sticks.”

ETFs to avoid

To avoid the ETF equivalent of spaghetti on the floor, Sotiroff and other ETF researchers suggest investors steer clear of funds with less than $100 million in assets that also display any of these red flags:

Risky strategies. Fund sponsors are increasingly offering strategies that stretch beyond plain vanilla. Think “triple leveraged” funds that use debt to triple the returns (or losses) of a basket of volatile stocks, for example, or “inverse” funds that profit when the stocks they focus on fall. Those kinds of funds tend to attract fickle, short-term traders rather than long-term investors. That helps explain why leveraged and inverse funds, which accounted for only 11% of all ETF launches, made up 16% of all ETF closures, says Aniket Ullal, head of ETF Research & Analytics for research firm CFRA.

Lagging returns. Companies tend to shutter funds that consistently underperform their competitors. Of 168 now-closed funds with Morningstar performance data for 2023, the average return was just 7%, in a year in which the S&P 500 index returned 26.3%. More than one-fourth of the shuttered funds lost money that year.

Missing profits. Investors naturally prefer to pay lower fees. But fund companies need to cover costs such as legal expenses, management and marketing. Any fund with a combination of fees and assets that fails to generate at least $100,000 a year is probably not making much money, Ullal says. According to Morningstar data, as of December 31, more than 900 of the approximately 4,000 ETFs currently traded in the U.S. were producing less than $100,000 a year for their sponsors.

If you see any of these red flags in funds that you own, it pays to monitor them, says Steven Novack, a CPA and certified financial planner for Altfest Personal Wealth Management in New York City. It’s important to check on each questionable fund separately; because the notification procedure is governed by a patchwork of laws and rules from the Securities and Exchange Commission, states and exchanges, one fund’s closure process may not match another’s. Generally speaking, if a fund’s board of directors votes to liquidate, the fund must at least issue a press release and add a supplement (sometimes called a “sticker”) to its prospectus laying out the schedule and process by which it plans to stop accepting new investments, sell its holdings and distribute the cash to shareholders.

Investors who don’t monitor such press releases can easily miss a closure notification. Major fund sponsors such as BlackRock typically don’t send closure notices directly to investors. And several major brokerages contacted by Kiplinger said that although they update fund documents on their sites with closure notices, they don’t automatically message investors about them. As a result, many investors may be surprised when they see cash replace shares in their portfolio.

What to do if your ETF closes

In the event you find out that a fund you’re holding is closing, Novack generally recommends that you sell your shares as soon as possible. Fund companies typically halt all trading in a closing ETF a few days before the liquidation date, and trading volume tends to decline as the end approaches. Thinly traded ETFs may see unusually wide spreads between the prices sellers are asking for their shares and the prices buyers are willing to pay, which means you might get a little less than you’d like.

To avoid selling at a discount, you can consider holding on until the bitter end, in which case you’ll get the fund’s full net asset value (the value of its underlying holdings, less liabilities) on the fund’s final day. It also pays to wait if those extra days or weeks put your holding period over the one-year mark, qualifying you for lower long-term capital gains tax rates.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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Equities rallied hard in an immediate reaction to Trump's win last November as the outcome "provided much-needed political clarity," says George Smith, portfolio strategist for LPL Financial. "The removal of election uncertainty, coupled with hopes for a pro-business environment under the new administration, boosted investor sentiment and contributed to market gains."

However, momentum stalled to start the new year, and a challenging macroeconomic backdrop could hint at continued technical troubles, says Adam Turnquist, LPL's chief technical strategist.

Still, despite uncertainty over Trump's proposed tariff policy and ongoing geopolitical turmoil, "there are plenty of reasons to be optimistic," Turnquist adds. "The economy is holding up well, earnings are expected to grow again this year by double digits (with contributions broadening beyond the mega-cap names), while the artificial intelligence (AI) theme continues to support market enthusiasm."

Turnquist adds that the Trump administration is "expected to bring a pro-growth agenda, less regulatory oversight, and potentially lower taxes," though some of these policies could boost inflation and the U.S. deficit.

Here, we examine the second Trump administration's potential impact on the stock market and your portfolio.

Interest in crypto is expected to rise

Bitcoin and other digital currencies surged in 2024 due in part to then-candidate Trump's about-face on crypto. In his first term, Trump was not a fan, as evidenced by a July 2019 post on what was then Twitter and is now X where he said the value of cryptocurrencies is "highly volatile and based on thin air."

But, by 2024, Trump had warmed to digital assets, saying he planned to make the U.S. the "crypto capital of the planet." And World Liberty Financial, a cryptocurrency business backed by the Trump family, launched its own token in October. And in the days leading up to his inauguration, Trump and First Lady Melania Trump launched their own respective meme coins.

In reaction, bitcoin prices popped back up to $107,000 and Wall Street expects even more upside in 2025.

"[S]peculation surrounding the ... Trump administration's potential establishment of a U.S. bitcoin reserve – an initiative analysts estimate has a 60% likelihood – could help the cryptocurrency" surge, says Matt Mena, crypto research strategist at 21Shares.

He adds that the bullish outlook for crypto is also getting a lift from the anticipation of a pro-crypto administration and a Congress controlled by tech-friendly Republicans. "Analysts are projecting a path to $150,000, driven by a confluence of supportive policies and increasing institutional interest," Mena says.

Trump could spark interest in new ETFs

The Trump-inspired turn toward crypto could also funnel more money into the burgeoning exchange-traded fund (ETF) market.

ETF assets jumped 28% year over year in 2024 to $10.36 trillion, driven by market gains and a record $1.12 trillion in inflows, says Aniket Ullal, head of ETF Research & Analytics at CFRA. "Growth-oriented cyclical themes like crypto and the 'Magnificent 7' dominated the best-performing ETF categories based on total returns in 2024," he adds.

And $41 billion of net new assets flowed into bitcoin and crypto ETFs, say FactSet's Director of Global Fund Analytics Elisabeth Kashner and Senior ETF Analyst of Global Fund Analytics Lois Gregson, which "underscores growing investor interest."

Kashner and Gregson add that surging interest in cryptocurrency due in part to Trump's reversal on digital assets "suggests a probable rise in the launch of trend-driven ETFs such as those combining bitcoin with hedging strategies, diversified asset class stackings, and other alternative investments for fear of missing out."

Tariffs could stall the stock market rally

A big reason stocks have sold off to start the year is investors' concern that Trump's tariff proposals will fuel inflation.

"Most economists believe the effects will likely include a stronger dollar, higher inflation and interest rates, a decline in growth for countries that export to the U.S., and retaliation by at least some of them," writes Kiplinger contributor James K. Glassman in his feature "How to Hedge Against Tariffs."

Glassman adds that "the fallout will probably depress the profits of American companies with strong sales abroad."

Initial expectations were that the new administration would impose tariffs of up to 20% on all imports and a 60% punitive tax on Chinese imports on Day 1. However, more recent reports suggest the Trump team will levy 25% tariffs on Mexico and Canada on February 1.

If inflation re-accelerates, the stock market may need to adjust expectations to "what could be a slower and shallower Fed rate-cutting cycle than markets are currently pricing in," LPL Financial's George Smith says.

Uncertainty over corporate tax rates could create volatility

"While the full menu of potential policy actions and their respective details remain unknown, President Trump has strongly signaled his desire for lower taxes, federal budget cuts and greater deregulation," writes Morgan Stanley Investment Strategist Monica Guerra.

As for tax policy, the Trump administration and Republican-controlled Congress are widely expected to extend most expiring provisions of the 2017 Tax Cuts and Jobs Act (TCJA). Guerra notes that this has consequences for individual investors namely in the form of income tax brackets and estate and gift tax exclusions.

She points out that it's the uncertainty surrounding corporate tax cuts that could spark a selloff in stocks. Specifically, while Trump has proposed dropping the flat corporate tax rate to 15% from 21%, "fiscal concerns and the need for revenue offsets may drive lawmakers to hold the 21% corporate tax rate steady."

Guerra adds that "unchanged corporate income taxes or the consideration of other corporate tax increases to offset deficit spending could disappoint financial markets."

The bottom line

There's no way to tell for sure exactly what the Trump administration will do and what impacts the initiatives that do get through will have on the stock market.

And with the 10-year Treasury yield up significantly since Trump won the election, the bond market could create boundaries to just how much the administration can do without sinking the stock market.

Still, "with uncertainties stemming from the new administration's policy initiatives and equity markets priced to perfection, there is little room for error regarding economic and earnings disappointments – particularly if the Federal Reserve (Fed) is unable to cut interest rates further should inflation surprise to the upside," says Larry Adam, chief investment officer at Raymond James.

And it's this uncertainty, he adds, that "will likely lead to higher volatility in 2025."

For market participants, this means staying the course on longer-term investment strategy. "An effective goals-based investment approach assumes unexpected twists and turns in the market are inevitable and can provide investors with the ability and confidence they need to ride out volatility, say Glenmede's Chief of Investment Strategy and Research Jason Pride and Vice President of Investment Strategy Mike Reynolds.

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The 2023 regional banking crisis brought bank stocks into mainstream focus for the first time since 2008. The turmoil began nearly three years ago when state banking authorities abruptly closed Silicon Valley Bank, and the Federal Deposit Insurance Corporation (FDIC) stepped in as receiver.

At the heart of the crisis was a liquidity issue. Silicon Valley Bank's balance sheet was heavily concentrated in long-term bonds, which had significantly declined in value due to rising interest rates. These bonds, if held to maturity, would have returned their full principal.

However, to meet short-term liquidity demands during a sudden rush of withdrawals, the bank was forced to consider selling these bonds at a substantial loss, triggering its collapse. The panic spread to other regional banks, with Signature Bank suffering a similar fate just two days later.

While regulators allowed these banks to fail, they ensured depositors were made whole, though shareholders were wiped out and unsecured creditors faced losses. For investors, this crisis was a lesson in liquidity risk but also a moment to consider a smarter way to invest in the financial sector: through bank ETFs.

Bank ETFs lower the barriers to investing

Despite their relatively attractive prices compared to other U.S. market sectors, banks can be difficult for retail investors to analyze — largely due to their complexity and unique sources of risk.

At the most basic level, banks are intermediaries for capital flow: money coming in and out. Their growth depends primarily on deposits since loans are easier to expand. After all, there's always someone who wants to borrow money.

The real challenge is attracting deposits without paying high interest rates. To solve this, banks often take on risks by leveraging their equity to make loans or investments.

The problem is that banks are always tempted to overextend their lending because it boosts their returns when times are good. They can effectively lend more money than they actually have, which seemingly works until it doesn't, like in 2008.

A good bank thus focuses on securing low-cost deposits — think everyday people with checking accounts earning minimal interest, like at Bank of America (BAC). Compare that to Silicon Valley Bank, where the funds came largely from commercial accounts, a much riskier setup.

So before investing in an individual bank, really think about how they fail. In general, a bank collapses when losses wipe out its equity or if depositors panic and trigger a bank run.

To understand how well a bank handles risk, you need to examine metrics such as the charge-off ratio or non-performing loan (NPL) ratio. These numbers tell you how many loans have gone bad compared to the bank's total loans, offering insight into how responsibly they lend.

If a bank is writing off loans at higher rates than its peers, it could mean they're likely lending to the wrong people. You'll also want to look at the types of loans they make. Are they focusing on mortgages, auto loans, credit cards or commercial real estate? Each type carries its own risks.

Another important measure here is the CET1 (Common Equity Tier 1) ratio. This number compares a bank's capital to its risk-weighted assets, such as loans and investments. A higher CET1 ratio means the bank is better equipped to handle potential losses, which is why regulators rely on it to gauge financial health.

If all this feels overwhelming, don't worry; it's where diversification comes in. Instead of trying to figure out which individual bank is the best deal or the safest option, you can just buy them all.

By investing in bank ETFs, you gain exposure to a broad basket of financial stocks, giving you access to the industry's overall performance without needing to become an expert on specific institutions.

How we chose the best bank ETFs to buy

Our focus is on getting you the best value, and a big part of that involves minimizing expense ratios. According to the ETF Central database, there are 14 bank ETFs available, with expense ratios ranging from 0.35% to 0.92%. All five of our picks sit at the low end of this range, ensuring better cost efficiency for investors.

We also avoided gimmicks. By that, we mean bank ETFs that short the sector with inverse exposure or that offer leveraged returns. These types of ETFs are risky and expensive, designed for short-term traders rather than long-term, buy-and-hold investors.

Invesco KBW Regional Banking ETF

• Assets under management: $50.0 million
• Expenses: 0.35%
• Dividend yield: 2.7%

The Invesco KBW Regional Banking ETF (KBWR) tracks the KBW Nasdaq Regional Banking Index. KBW, or Keefe, Bruyette & Woods, Inc., is an investment bank specializing in the financial sector, known for its expertise in banking. Its various benchmarks are widely used to track industry performance.

KBWR currently holds 53 regional banking stocks, with its top three holdings as of November 11 being Webster Financial Corp (WBS), Wintrust Financial Corp (WTFC), and Southstate Bank Corp (SSB) at weightings of roughly 4% apiece.

Learn more about KBWR at the Invesco provider site.

Invesco KBW Bank ETF

• Assets under management: $5.8 billion
• Expenses: 0.35%
• Dividend yield: 2.4%

The Invesco KBW Bank ETF (KBWB) is the big brother to KBWR, offering broader exposure to the U.S. banking sector beyond just the regional banks. If you're looking for a "default" option for comprehensive bank sector coverage, KBWB fits the bill. It tracks the KBW Nasdaq BankTM Index.

KBWB's portfolio of 30 bank stocks is weighted using a modified market-cap methodology. Unsurprisingly, the fund's top holdings include blue chip stocks such as JPMorgan Chase (JPM), Morgan Stanley (MS), Wells Fargo (WFC), Goldman Sachs Group (GS) and Bank of America (BAC).

Learn more about KBWB at the Invesco provider site.

SPDR S&P Regional Banking ETF

• Assets under management: $3.1 billion
• Expenses: 0.35%
• Dividend yield: 2.6%

The SPDR S&P Regional Banking ETF (KRE) tracks the S&P Regional Banks Select Industry Index, a portfolio of 148 regional banks selected from the S&P Total Market Index. Unlike most ETFs, KRE uses an equal-weighted approach, giving more balanced exposure to mid- and small-cap banks.

It is a well-capitalized fund with $3.1 billion in assets under management and features a fairly active options chain, including weekly contracts. It’s a popular choice for selling covered calls.

Learn more about KRE at the State Street Global Advisors' provider site.

SPDR S&P® Bank ETF

• Assets under management: $1.4 billion
• Expenses: 0.35%
• Dividend yield: 2.4%

The SPDR S&P Bank ETF (KBE) is the non-regional-focused counterpart to KRE, tracking the S&P Banks Select Industry Index. This ETF selects 104 holdings from the S&P Total Market Index, offering more diversification compared to KRE's regional-only focus.

But unlike KBWB, KBE uses an equal-weight approach, so larger domestic banks don't dominate its top positions. Between rebalances, the top holdings are typically the banks that have recently outperformed. Currently, these include Comerica (CMA) and BankUnited (BKU).

Learn more about KBE at the State Street Global Advisors' provider site.

Themes Global Systemically Important Banks ETF

• Assets under management: $18.3 million
• Expenses: 0.35%
• Dividend yield: 1.1%

Global systemically important banks (G-SIBs) are financial institutions designated by the Financial Stability Board and the Basel Committee on Banking Supervision as critical to the global economy.

Because of their size, interconnectedness, and importance, these banks are held to higher standards, requiring them to maintain larger capital buffers to absorb potential losses and undergo more stringent regulatory supervision to ensure financial stability.

If you want to invest in the biggest, safest banks, the Themes Global Systemically Important Banks ETF (GSIB) is one of the best bank ETFs to do so. This actively managed fund holds a portfolio of 32 large-cap banks from around the world. Notable top holdings include Morgan Stanley, Wells Fargo and Goldman Sachs.

Learn more about Themes at the Themes ETFs provider site.

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"The U.S. is in the early innings of reindustrialization, a multi-decade investment opportunity that will restore growth to the U.S. industrial economy following 20-plus years of stagnation," Morgan Stanley research analyst Chris Snyder wrote in a recent report.

The big infrastructure buildout is worth paying attention to because it encompasses a broad range of businesses in a number of sectors. Many infrastructure companies are old line industrials, including businesses that make heavy machinery or parts for industrial production. Other companies provide services to such businesses or transport goods or people. Also included under the infrastructure tent are companies in the materials, energy and utilities sectors. Even some tech firms are considered infrastructure plays these days.

It's the dawn of a new era for infrastructure spending

America's manufacturing industry is beginning to reassert itself. The dominance of U.S. industrial firms began to decline when China joined the World Trade Organization in 2001. Back then, American industrial companies made up roughly 12% of the market value of the S&P 500.

But cheap labor abroad and a focus on globalization helped to undermine the sector, as companies moved manufacturing overseas. (At the same time, the soaring fortunes of technology-related firms shifted market leadership in their direction.) Today, industrial stocks represent just over 8.5% of the S&P 500.

But the tide is turning. The COVID-19 pandemic highlighted the downsides of operating some businesses on an international scale. Think back to the floating traffic jam of 50 container ships in the Pacific Ocean waiting to dock in California in 2021. Such supply-chain snafus increasingly spurred domestic companies to bring production back to the U.S., and some foreign firms are building manufacturing plants in the U.S. to be closer to their American customers.

As the shift got under way, it became abundantly clear that the country's aging infrastructure, after decades of underinvestment, badly needed an upgrade, from the power grid to railways, bridges, highways and airports. Politicians on both sides of the political aisle agreed. Between 2021 and the end of 2022, lawmakers decided to allocate nearly $2 trillion in federal funding and other incentives to restore manufacturing in America and upgrade the country's infrastructure through a combination of three acts: the Infrastructure Investment and Jobs Act, the Inflation Reduction Act and the CHIPS and Science Act.

"This massive investment could drive long-term growth for the industrials sector for years to come," says Fidelity's David Wagner, who runs the firm's Select Industrials Portfolio.

More than 60,000 projects have been announced as part of the $1.2 trillion Infrastructure Investment and Jobs Act, including 10,000 bridge projects, 175,000 miles of roadway repairs and 1,100 airport modernization projects, among other things.

Nearly $60 million, for instance, will pay for a seventh runway, as well as other upgrades, at Denver International Airport. And $30 billion of the $280 billion CHIPS and Science Act has been earmarked to help fund 23 projects, including 16 new semiconductor manufacturing facilities in 15 states so far. Two years ago, the U.S. produced none of the world's most advanced chips, according to the government. By 2032, the country will produce nearly 30% of the global supply of leading-edge chips.

Indeed, an unprecedented amount of spending is being "funneled into a relatively small area of the U.S. economy," says Yung-Yu Ma, chief investment officer of BMO Wealth Management, who has been recommending that investors allocate a bigger percentage of their portfolio to U.S. infrastructure since early 2023. "These trends are strong and durable," he says.

There's room for infrastructure stocks to run

Judging by the soaring returns in some bellwether stocks, the industrial renaissance is well underway. Industrial giants such as Caterpillar (CAT), GE Aerospace (GE) and RTX (RTX) have each posted gains of more than 50% over the past 12 months – ahead of the 34% climb in the S&P 500.

There's even an artificial intelligence (AI) angle to some infrastructure stocks that is fueling share-price increases. Mounting demand for data centers to handle AI tasks, for instance, has pushed shares in Digital Realty Trust (DLR), a real estate investment trust (REIT) that specializes in data centers, up 45% over the past 12 months. The stock now trades at a five-year-high price-to-earnings (P/E) ratio based on estimated earnings for the year ahead.

But it's not too late for investors to cash in on the infrastructure rally. For starters, only a relatively small portion – roughly 20% – of the total money set aside in the spending bills has been spent so far. And these projects take time to get up and running. "We're in the middle of the third inning of the infrastructure trend. There's still a good way to go," Ma says.

The best infrastructure stocks to buy

Given the breadth of spending that the infrastructure bills cover, there are many ways for investors to cash in on the industrial renaissance. "You're seeing this wide array of project announcements – in the energy sector, in commercial infrastructure, public infrastructure, utilities," says Fidelity's Wagner. "It's multifaceted, which is different than other up cycles in industrials. It's not a play on one end market or one subindustry cycle."

We've highlighted seven companies, in a variety of industries, that we expect to benefit from infrastructure spending. Be patient with these investments. Some may win over the near term, but most may take time to pay off.

"We're not building these factories in days or months. They're going to take quarters and years," says Jason Adams, who runs T. Rowe Price Global Industrials fund. "There's still a lot of buildout to go." Returns and data for the investments below are through November 30, unless otherwise noted.

Aecom

Big construction projects need to be managed efficiently, and that's what Aecom (ACM) does. The infrastructure professional-services firm plays the role of maestro over the life of a building project. It also offers advisory, planning, design and engineering services – and more.

"Aecom is a high-quality, low-risk way to play secular growth in global infrastructure," says Truist Securities analyst Jamie Cook, who recommends the large-cap stock.

New contracts at home and abroad are flowing in. Roughly three-fourths of the company's business is stateside. In October, Aecom won a Texas Department of Transportation contract to provide design services for a segment of Highway I-45 in Houston. And in September, it agreed to manage the construction of a new terminal at San Diego International Airport, among other improvement projects there.

Another fourth of Aecom's business is overseas, and last fall it won separate contracts for services in water-supply programs in South Africa and the U.K., as well as a rapid-transport project in Bangkok to design tunnels and tunnel ventilation systems, among other things.

"We expect growing demand for environmental, road and water projects to provide the company's design and consulting service with a stable source of revenue," says Argus Research analyst John Staszak, who rates the stock a Buy.

The recent contract wins have helped boost shares 28% since the start of 2024. Yet the stock is still relatively inexpensive. It trades at 23 times expected 2025 earnings – a discount to other engineering and research-and-development services firms, which trade at a median P/E of 26, according to Zacks Investment Research.

Eaton

Electricity demand is expected to soar thanks to the use of artificial intelligence, reshoring efforts, and the growing adoption of electric vehicles and renewable energy.

"We expect electricity demand to double between now and 2050," says Bernstein Research analyst Chad Dillard. To put that in perspective, over the next five years, electricity demand could increase at an average annual pace of 1.7%, which is far faster than the 0.4% annual growth rate in demand over the past decade.

To keep up, utilities must upgrade their electrical infrastructure. Spending on electrical equipment could rise by as much as 3% to 7% per year, on average. As a result, electrical-equipment manufacturers such as Eaton (ETN) are poised to deliver double-digit earnings growth, says Dillard.

Eaton makes electrical systems and components for end users in multiple sectors and industries, including utilities, manufacturing, commercial and residential property, automakers, aviation, and technology. The company's broad array of customers makes Eaton a beneficiary of several megatrends, including the upgrade of America's power grid as well as the buildout of data centers. An aging airplane fleet amid a rise in air-travel demand is boosting orders for Eaton's aerospace equipment.

Shares have climbed 67% over the past 12 months, so don't expect a similar pop in 2025. But there's still upside left, says UBS Securities analyst Amit Mehrotra, whose 12-month price target for the stock, $431, represents a 15% gain from the current share price.

"We think the company can sustain high-single-digit revenue growth for several years to come," says Mehrotra – a respectable pace for a company with a $148 billion market value. The company's plan to buy back nearly $14 billion in shares over the next four years also bodes well for the stock.

And despite the runup, Eaton's stock isn't expensive relative to peers. Its P/E of just 31 is a tad below the machinery and electrical equipment industry and is justified by estimates of 12% earnings growth over each of the next three years – a smidge ahead of its peers. Still, we'd be on the lookout for lower entry points to pounce on the stock.

GE Vernova

GE Vernova (GEV) – an energy equipment and services company – was formed last year from the merger and then spinoff of General Electric's various energy businesses, including renewable energy, power, digital and energy financial services. The stock has been trading only since April 2024. (General Electric shareholders received one share of GE Vernova for every four shares of GE.) But given its provenance, GE Vernova is a powerhouse. Its natural gas and wind turbines generate roughly 30% of the planet's electricity, according to the company.

That puts the firm in position to gain from the world's rising demand for power. But GE Vernova is also a player in the transition to a larger and more sustainable electric power system. About $73 billion of the Infrastructure Investment and Jobs Act is pegged to grants that will encourage investment in energy efficiency, greenhouse-gas emission reduction and clean-energy technologies – and that's the stomping ground of GE Vernova's electrification business segment, which among other things is working to leverage AI to build a digital power grid.

It is possible that under President Trump, renewable energy may get less attention and money, which would be bad news for GE Vernova's electrification business. But William Blair Research analyst Jed Dorsheimer says Trump's nominee for Secretary of Energy, Chris Wright, is likely good news for GE Vernova's power-generation business, which is dominated by natural gas power and represents 40% of overall revenue. The reason: Wright is chief executive of Liberty Energy (LBRT), a fracking company. (Vernova's power business also includes hydroelectric, nuclear and steam power.)

GE Vernova's sky-high P/E of 50 is a negative, for sure. But "the Street is underestimating the company's growth potential," says Jefferies Financial Group analyst Julien Dumoulin-Smith. After a 7% climb in revenues in 2024, he expects sales growth to tick up 12% in 2025 and 9% in 2026.

All of the firm's three business segments – power, wind and electrification – seem poised to do well in 2025, he adds; its wind business has been a drag of late but is improving. For the company overall, Dumoulin-Smith estimates 40% average annual growth in earnings before income tax and interest over the next three years, due in part to pruning of the unprofitable wind business and big gains in its larger businesses, power and electrification. We'd still be choosy about entry points with this utility stock; it's best to buy on dips.

Rockwell Automation

A significant portion of the equipment in factories dates to the 1970s and 1980s and needs an upgrade, says Morningstar stock analyst Nicholas Lieb. That works in Rockwell Automation's (ROK) favor because the company makes equipment and software products that help factories automate their processes and operate more efficiently.

ROK's analytic software helped Kraft Heinz (KHZ) improve the operational efficiency of its Ore-Ida potato products facility in Oregon. From peeling potatoes to packaging the products, the system increased Ore-Ida's production capacity by 10%.

Rockwell also helps its customers maintain and update their systems. A dedicated phone line at a mill for International Paper (IP) is connected to Rockwell engineers to help monitor and troubleshoot operations. "Without this help from Rockwell, International Paper would be forced to hire another engineer," says Lieb, which could cost the company more.

But a slump in global manufacturing has weighed on Rockwell shares over the past 12 months. Elevated interest rates (and thus higher borrowing costs) made many of the company's customers cautious about spending on new equipment. At the same time, a surfeit of goods (a post-pandemic outcome following supply-chain challenges) prompted many manufacturers to pause production and wait for demand to catch up with supply. In its most recent fiscal year, which ended in September, Rockwell's revenues dipped by 9% and earnings by 20%. That drag could extend into 2025.

Rockwell hasn't been sitting on its hands. In the summer of 2024, the company announced plans to lay off 3% of its global workforce. It has been buying back stock, too. In 2024, it repurchased 2.2 million shares at an average price of $270. Even so, investors have been unenthusiastic, and the stock has gained just 9% over the past 12 months.

Though Rockwell shares are not expensive, they're not a screaming bargain either. The stock trades at 31 times earnings, which is on par with the stock's median P/E over the past decade. But for patient investors, Rockwell could pay off. Although a consensus of analysts expects earnings growth to contract by 2.5% in 2025 compared with 2024 levels, things will look up in 2026, when analysts project a 19% jump in profits.

United Rentals

Reshoring requires equipment to build things. But construction companies have been opting more and more to rent equipment rather than to buy and maintain it on their own, says Jason Adams, manager of T. Rowe Price Global Industrials fund. That puts United Rentals (URI), a rental company with a large and diverse fleet of construction equipment, in good shape to benefit from large infrastructure projects.

United is already busy. It has been supplying equipment for several large-scale construction projects, including a 131-acre entertainment and shopping complex in Miami that will feature a new stadium for the city's major-league soccer team. Smaller projects have been on pause, but as interest rates continue to fall, lower borrowing costs should spur more activity on that front, says Value Line analyst Nils Van Liew. And acquisitions of smaller companies that complement United's business could boost growth.

The catch: Shares are up 83% over the past 12 months. They currently trade at 18 times earnings – level with the rest of the building- and construction-products market, but ahead of the stock's 10-year historical P/E of 12. Shares could tread water while United digests recent gains.

Vulcan Materials

Vulcan Materials (VMC) is the leading rock quarry company in the U.S. That means as more liquid natural gas facilities, warehouses, battery plants and factories are constructed here, "Vulcan is going to sell a lot of rock to build the foundations," says Bruce Kennedy, a portfolio manager of DF Dent Midcap Growth. "Rock has been used to build roads since the days of Babylon," he adds. "And there are no other substitutes."

Vulcan makes money by selling crushed rock – and it pulls in even more to ship it. Many of Vulcan's quarries and distribution yards are near fast-growing metro areas of the U.S. (cities in Texas, North and South Carolina, and Florida, for example). New permits for quarries are hard to come by, which diminishes threats from competitors, giving the company both "pricing power and low obsolescence risk," says Kennedy. And Vulcan boasts a materials reserve of 69 years, at current levels of production.

According to Zacks, analysts expect average annual earnings growth of 14.5% over the next three years, better than the 9.6% pace the company recorded over the past five years. Kennedy expects earnings to jump 22.5% in 2025 compared with 2024. The stock trades at an above-market 32 times earnings, but that's in line with its 10-year historical P/E.

Xylem

The Infrastructure Investment and Jobs Act will provide $50 billion to improve our nation's drinking water, wastewater and stormwater infrastructure. It's the single largest investment in water the government has ever made, according to the Environmental Protection Agency. Xylem (XYL), a global water technology company, is primed to benefit because it makes equipment for water transport, treatment, testing and use.

Supply-chain bottlenecks have been a hurdle for Xylem of late, but its high-tech products, such as its smart water meters, have been in big demand, says CFRA Research analyst Jonathan Sakraida, who rates the stock a Strong Buy. When all the numbers are in, he expects them to show revenues jumped 16% in 2024 compared with 2023. That's ahead of the firm's five-year historical revenue growth rate of 12%.

"Xylem is benefiting from the digital transformation of the water business, with accelerating industry adoption of digital solutions," Sakraida says. Another boost will come from updated regulations on forever chemicals and other contaminants in drinking water.

We appreciate Xylem's environmental stewardship, and the stock has earned a place in the Kiplinger ESG 20, the list of our favorite stocks and funds with an environmental, social or corporate governance focus. But this pure-play water in-frastructure company deserves mention in a list of infrastructure beneficiaries, too.

Even so, the stock has been a bit "underappreciated" in recent months, says Sakraida, as investors realized that the allocation of Infrastructure Investment and Jobs Act funds would be more of a "slow burn" than "explosive" to the water company's sales and earnings growth.

Shares have climbed just 12% since the start of 2024. But that means they're a relative bargain. Xylem stock trades at 27 times expected earnings – well below the stock's five-year median P/E of 34, according to Zacks. Analysts expect annualized earnings growth of 13% over the next three years, or a tad better than the 12% growth rate logged over the past five years.

The best infrastructure funds to buy

Investing in individual stocks can be rewarding, but some investors may prefer to diffuse the risk by investing in several companies via a focused infrastructure fund. Here are our favorites.

Global X U.S. Infrastructure Development (PAVE) is an exchange-traded fund that offers broad exposure to companies involved in "the nuts-and-bolts buildout of bridges and roads, as well as to companies that play a role in electric-grid enhancements and even companies that rent out equipment," says chief investment officer of BMO Wealth Management Yung-Yu Ma.

The index fund boasts a robust, 22.1% annualized return over the past five years – the top return of all infrastructure funds. Trane Technologies (TT), Parker Hannifin (PH) and Eaton are the fund's top holdings. It charges a 0.47% expense ratio.

Invesco Building & Construction ETF (PKB) holds only building and construction companies, as its name implies, and fund-tracker Morningstar classifies it as an industrials sector fund. Compared with Global X U.S. Infrastructure Development, its portfolio is more concentrated (30 stocks), and it charges a higher expense ratio (0.57%). But its five-year annualized return of 21.1% beat 93% of its industrial-fund peers.

One-third of the portfolio is devoted to homebuilder stocks, including Lennar (LEN), NVR (NVR) and PulteGroup (PHM), which Global X U.S. Infrastructure Development doesn't own. Even so, the two ETFs share some of the same top holdings, including Trane Technologies, Martin Marietta Materials (MLM) and Argan (AGX).

We have our eye on Fidelity Infrastructure (FNSTX), though the fund is relatively new; it launched in November 2019. The 48-stock portfolio includes a slug of industrials (Waste Connections (WCN), Norfolk Southern (NSC)), utilities (NextEra Energy (NEE), Southern (SO)), real estate firms (American Tower (AMT)) and energy stocks (Williams Companies (WMB), Targa Resources (TRGP)).

But the fund's global focus – 23% of assets are invested in foreign stocks – has been a drag. Over the past five years, Fidelity Infrastructure has delivered a 9.1% annualized return. That was not as remunerative as some of the other funds mentioned here, but it beat the typical infrastructure fund. The fund's expense ratio is 0.95%.

Other industrials sector funds to consider include THE Fidelity MSCI Industrials ETF (FIDU); the Industrial Select Sector SPDR ETF (XLI); and the Vanguard Industrials ETF (VIS). All boast low fees and five-year annualized returns of better than 13%.

Finally, though Fidelity Select Industrials (FCYIX) manager David Wagner is relatively new, the fund has returned a cumulative 49.6% since he took over in mid-2023 – better than the 36.8% gain in the S&P 500 Industrials Sector index over the same period. The fund charges 0.69% annually.

How Trump could impact infrastructure spending

Generally, most market watchers expect infrastructure spending to continue apace under President Trump. "Historically, spending money on roads, public works, airports, ports and harbors, and various parks has been something that Democrats and Republicans agree on," says Bruce Kennedy, manager of DF Dent Midcap Growth fund. "Representatives like to go back home for a ribbon cutting."

Indeed, changes to any of the three major infrastructure acts – the Infrastructure Investment and Jobs Act of 2021 and the Inflation Reduction Act and the CHIPS and Science Act (both passed in 2022) – will likely be line by line, not a wholesale repeal, says Jake Schurmeier, a Harbor Capital manager of multi-asset portfolios. "Trump is a populist, and 60% of the spending under these acts goes to Republican states, so it isn't in his interest to cut back on spending," he adds.

The $280 billion CHIPS and Science Act passed with a lot of bipartisan support, too. "I expect by and large that will be untouched," says Schurmeier. About $55 billion has been spent, with Intel (INTC), Micron Technology (MU), Taiwan Semiconductor Manufacturing (TSM) and Samsung having received some of the funds.

Most at risk are the environmental tax credits in the $400 billion Inflation Reduction Act. Even so, Republicans will likely "take a scalpel, not a sledgehammer," to the IRA, says John Duncan, a principal with the Meridian Research Group, which provides insight on public policy to investors and corporations. Among the credits likely to go on the chopping block is the $7,500 credit for buyers of new electric vehicles, as well as tax credits for companies that generate clean power (solar, wind) or that develop clean energy technologies.

Finally, Trump's America-first agenda means his administration "has a clear interest in building out America and building up America," says Bob Robotti, founder of Robotti & Company Advisors. Whatever your politics, that bodes well for infrastructure spending and the stocks that will benefit from it.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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Aniket Ullal, head of ETF research and analytics at CFRA Research, recently examined the ETFs launched over the 10-year period ending June 30, 2024, to identify trends among the successes. Ullal did not look at the funds’ returns, so “success” here is defined in terms of gathering enough assets to survive and, for many, thrive — which is, after all, ultimately what determines the selection available to investors.

He found that of the 3,426 ETFs launched (not including mutual fund conversions), only 38% were viable, meaning they remained listed and exceeded $100 million in peak assets. Some 10% of the listings crossed the $1 billion mark in assets at some point over the decade. Among his other observations:

Pioneers are rewarded. Among the most successful launches of the decade (again, in terms of assets) were iShares Bitcoin Trust (IBIT) and JPMorgan Equity Premium Income ETF (JEPI).

Though not the first entrants in their nascent categories, they had cost advantages and well-heeled sponsors.

The JPMorgan fund, which uses a covered-call options strategy that invests in high-quality stocks and then sells options against those holdings to boost income, has garnered $36 billion in assets (as of October 31) since its May 2020 launch, making it the most popular ETF of the decade.

The path to $1 billion varies. The Bitcoin Trust ETF reached $1 billion in just seven days; Pacer U.S. Cash Cows 100 (COWZ), which targets companies with high free cash flow, took almost five years to reach $1 billion.

Tapping into the zeitgeist works… JPMorgan Ultra-Short Income (JPST) and iShares 0-3 Month Treasury Bond (SGOV) prospered when investors sought funds that are less sensitive to interest rate moves after the Federal Reserve began an aggressive rate-hiking cycle. Invesco NASDAQ 100 ETF (QQQM), a more recent version of the parent fund (QQQ), grew as investors looked for a proxy for the Magnificent Seven stocks.

…Until it doesn’t. Ark Innovation (ARKK) rode the wave of ultra-high-growth stocks in 2020 and 2021 until it became the largest actively managed ETF at the time, reaching peak assets of $28.2 billion. A subsequent correction in Tesla and other highfliers, however, led to a significant decline in Innovation’s assets, which stood at just $5.4 billion recently.

Bonds have beaten stocks. Bond ETF launches have been more successful over the decade, with 50% reaching the $100 million viability threshold, compared with 36% for stock-focused ETFs. Success rates for commodity and alternative ETFs were much lower.

Looking ahead, Ullal says managers are increasingly launching more complex products, such as defined-outcome ETFs, which offer investors protection from losses in exchange for capping potential gains; actively managed stock funds; and ETFs tied to specific themes. “I’m always amazed by how people come up with new ideas,” he says.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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What should we expect in 2025? With Donald Trump winning another presidential term, there has been a broad rally in digital asset prices. Many investors seem to expect the next Trump administration to provide more support for digital assets and likely remove governmental obstacles to crypto projects. SEC Chairman Gary Gensler has announced his upcoming departure as head of the SEC. Gensler has been a critic of digital assets and brought several lawsuits against various crypto projects on behalf of the U.S. government. The current Trump administration nominee to run the SEC, Paul Atkins, is expected to be much less hostile to crypto and regulation of crypto exchanges. This might mean the SEC will turn its attention to other issues and not focus on taking action to restrict certain digital assets.

This may explain the rally in digital assets prices we’ve seen since the 2024 presidential election. Bitcoin has topped $100,000 in December, which is a significant milestone. Many other top digital assets are seeing major price gains as well.

New ETFs mean a new way to invest

Earlier this year, the SEC approved the launch of several bitcoin (BTC) exchange-traded funds. What does this mean for bitcoin investing? Before the launch of ETFs, investors could invest in bitcoin only by holding the tokens directly, through an exchange or in limited circumstances a fund, such as the Grayscale Bitcoin Trust. However, due to the structure of the Grayscale Trust, it didn’t always track the price performance of bitcoin itself.

The new bitcoin ETFs are designed to more closely track the price of bitcoin while offering lower costs to investors and allowing for intraday trading, similar to buying or selling a stock. As of October 2024, the largest among them is the iShares Bitcoin Trust ETF, with $21.1 billion in assets. The launch of these ETFs and increased liquidity is expected to attract more institutional interest in digital assets and increase inflows into bitcoin ETFs.

Hot on the heels of bitcoin ETFs, the SEC approved ethereum ETFs later in 2024, and similar ethereum-tracking ETFs launched shortly afterward. Currently, the largest ETF in this space is the Grayscale Ethereum Trust, with $972 million in assets. Ethereum is typically the second-largest crypto asset by value, after bitcoin. Both bitcoin and ethereum are the most well-known and liquid digital assets, largely due to their strong investor bases and extensive network usage. Ethereum is often recognized for its versatile smart contract capabilities, while bitcoin remains dominant as a store of value.

Some providers, like Bitwise, also offer ETFs that invest in digital assets beyond bitcoin and ethereum, such as Solana, XRP (Ripple) and Cardano. However, these lesser-known digital assets tend to be more volatile and less liquid. Their prices are often driven by behind-the-scenes trading, making pricing trends harder to predict. For that reason, risk-averse investors may want to avoid investing in lesser-known cryptos. Additionally, these assets may carry more regulatory risk or idiosyncratic risk.

Buying digital assets direct vs ETF investing

For investors seeking certain features, such as active tax-loss harvesting, owning digital assets directly may still be valuable. Currently, tax law does not subject digital assets to wash-sale restrictions, meaning investors can sell digital assets to harvest tax losses and then immediately buy them back. This is not allowed with marketable securities, offering a potentially significant advantage for taxable crypto investors looking to offset capital gains.

However, owning digital assets directly on an exchange introduces complications, such as the risk of being hacked or managing a digital wallet. Unlike traditional securities, digital assets are not as regulated, and fewer protections are in place than on traditional brokerage platforms. For casual investors, digital asset ETFs may remove some of these headaches. A financial adviser can help you determine an appropriate approach to investing in digital assets.

Digital asset price trends

Bitcoin has a history of dramatic price swings. At the start of 2024, it was priced around $44,000, and as of December 12, 2024, it has climbed to $100,033 — a roughly 126% return year to date. In comparison over the same period, the S&P 500, representing U.S. large cap stocks, has risen a little over 27% year to date, and ethereum has gained about 64%.

While such returns can excite investors, it’s critical to remember that this comes with significant risk. For example, bitcoin peaked at about $65,000 in November 2021, only to crash to $16,625 by January 2023 — a staggering 74% price drop. While bitcoin has since increased, investors who bought in near the 2021 high may have endured years of losses if they remained invested.

Investors may be drawn to crypto by stories of some early adopters becoming millionaires, but it’s essential not to invest more than you can afford to lose. A conservative allocation to digital assets may be appropriate in an effort to avoid negatively impacting an investor’s financial future. Digital assets are not for everyone, but a financial adviser may be able to help integrate them into a diversified portfolio.

It should be noted that investing in digital assets comes with significant risk of loss (including complete loss) that you should be prepared to bear, including, but not limited to, volatile market price swings or flash crashes, market manipulation, economic, regulatory, technical, and cybersecurity risks. In addition, digital asset markets and exchanges are not regulated with the same controls or customer protections available when investing in traditional asset classes.

Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant.

The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without previous notice. There is no guarantee any forward-looking statement will come to pass. All opinions or views reflect the judgment of the author as of the publication date and are subject to change without notice. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. This material should not be relied upon by you in evaluating the merits of investing in any securities or products mentioned herein. In addition, the Investor should make an independent assessment of the legal, regulatory, tax, credit, and accounting and determine, together with their own professional advisers if any of the investments mentioned herein are suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance. Any reference to a specific investment or product is for informational purposes only and should not be construed as a recommendation or endorsement thereof. Any reference to a market index is included for illustrative purposes only as it is not possible to directly invest in an index.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Several name-brand ETFs offer lower-cost, higher-returning clones, nicknamed "mini-mes." Although informally named after the small sidekick of Dr. Evil in the Austin Powers movies, mini-me funds are heroes for investors, says Dan Sotiroff, a senior analyst for investment research firm Morningstar.

They have some drawbacks. For example, because they are newer and less liquid than their bigger siblings, there are fewer options contracts linked to them. And they trade less efficiently, carrying slightly wider spreads between the prices a buyer is willing to pay and a seller is willing to accept. But for long-term investors, "the mini is a better deal," says Sotiroff. Or, as Austin Powers would say: "Yeah, baby!"

Cheaper versions of famous funds

Of course, many ETFs are index funds that attempt to replicate benchmarks such as the S&P 500. However, a true mini-me fund is an exact clone of a larger, well-established fund. A mini-me is managed by the same firm and holds the same portfolio but charges lower expenses and typically trades at lower prices.

Why are firms such as State Street, Invesco and BlackRock creating cheaper versions of their famous funds? They are trying to prevent their customers from switching to lower-cost competitors, explains Aniket Ullal, head of ETF data and analytics at CFRA Research. "The logic is that cannibalizing one's own product is preferable to losing share to a competitor," he says.

In addition, most of the mini-mes launched so far offer some additional profit opportunities for their fund sponsors. The mini-mes tend to be updated versions of older funds that were created before the Securities and Exchange Commission modernized rules for ETFs. Those original funds are technically trusts and have higher costs because they are legally barred from immediately reinvesting dividends received from stock investments, for example, or making money by lending securities.

See the table below (correct as of August 31, 2024) to compare five mini-me ETFs with their larger, original versions. Clones are highlighted in bold and located directly above the originals. N/A denotes the fund was not in existence over the entire period.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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"We outperformed the benchmark by about one percentage point, which is our goal," says Ford O'Neil, who leads the fund with Celso Munoz and four co-managers. The fund has outdone the Agg over the past three and five years, too.

Like most intermediate-term, high-quality bond funds, Fidelity Total Bond owns a mix of U.S. government debt, corporate bonds, and mortgage-backed or asset-backed securities. But the managers' tilts in those sectors have made all the difference.

Over the past year, for instance, the managers favored medium-maturity government debt over short- or long-term bonds. They also leaned into high-yield debt (IOUs rated double-B to triple-C) and emerging-markets bonds, which have performed well in recent months, says O'Neil.

The fund can invest up to 20% of assets in lower-quality debt securities. In the investment-grade (rated triple-A to triple-B) corporate-bond arena, O'Neil says the managers emphasized financial IOUs, in particular securities issued by big money-center banks such as JPMorgan Chase, Deutsche Bank and Barclays.

"The regulatory environment is still strong" in the banking sector, which helps to buoy credit quality, says O'Neil.

He and his cohorts don't expect a recession in the coming year, but they have been "reducing risk," says O'Neil. In particular, they're cautious about corporate bonds, given the sector's recent strong performance. "There's not a lot of opportunity there," he says. So the managers have been modestly paring back the fund's corporate-debt holdings and adding to Treasuries, which, says O'Neil, will “allow us to be nimble” and snap up securities in other sectors when opportunities (or volatility) arise.

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Since 2022, nearly 80 have been launched, according to investment research firm Morningstar, and $65 billion of net inflows have poured into them.

The attraction of these ETFs, often dubbed "boomer candy," is understandable. Through some financial engineering, they can provide relatively high and steady levels of monthly income (annual yields in the low-double-digit percentages are common) even when linked to an index such as the Nasdaq, whose stock components pay negligible dividends. Moreover, covered-call funds have the effect of tamping down volatility of the stocks or indexes they track.

At the same time, many financial advisers are skeptical whether investors adequately grasp the trade-offs entailed in what they're buying. "There are things that investors probably don't totally understand when they buy and hold covered calls," says Jonathan Treussard, founder of Treussard Capital Management. "For example, are you okay with giving up market upside but retaining downside risk in exchange for income?"

Before we look at some of the pros and cons of this burgeoning corner of the ETF universe, let's briefly examine how they work. (There are a multitude of different strategies of varying complexity, but we'll use a simple example to illustrate the dynamics.) An investor can sell (or write) a call option, a form of derivative, on an individual stock or on a market index such as the S&P 500.

An option contract gives the buyer the right to buy a security at a set price within a specified period. Let's say you write (sell) an option on a stock you own that expires a month from now at a stipulated "strike price" 5% higher than today's share price. If the market price rises to the strike price at the end of the one-month contract period, the option is "in the money" and the stock will be assigned (or called) to someone who buys or already holds the option contract. (Technically, in most cases, the stock may also be called prior to the end of the contract period.) The seller earns premium income from selling the call but has forfeited any price gain in the shares above the strike price.

Covered-call funds: the caveats

Bearing in mind the diversity of covered-call (also called buy-write) strategies, they have some characteristics in common. They will underperform their underlying indexes in bull markets, they will slide in bear markets but be slightly buffered due to the income from call premiums, and they may outperform in markets that move sideways.

For example, Morningstar calculates that since 2020, derivative-income ETFs tracking the S&P 500 captured a median 60% of the benchmark's gain (47% for those tied to the Nasdaq), while the ETFs experienced 72% of the index's downdrafts (60% for the Nasdaq).

Due to the math of compounding, the performance gap can be large over time: Simeon Hyman, global investment strategist for ProShares, says that over time, a typical monthly covered-call strategy will generate only one-third to one-half of the stock market's return. "If you don’t need the income, you don't need covered-call strategies," Hyman says.

The volatility of the funds is lower than that of the underlying index. Indeed, part of the appeal is that option-based strategies "monetize the volatility," because the greater the volatility in the index or stock, the higher the option value and, hence, the greater the income you'll earn. Thus, option income from calls written on the more-volatile, tech-laden Nasdaq and small-cap Russell 2000 Index tends to support higher monthly yields than on the less-jumpy Dow Jones Industrial Average and S&P 500 Index.

On the flip side, taxation of income generated by these funds tends to be high and often complex. (Depending on the implementation of option strategies, all the option income may be taxed as ordinary income.)

"It's very important to understand that, by and large, covered-call ETFs tend to be an order of magnitude less tax efficient than plain-vanilla ETFs, and in a way that isn't understood by the investing public," says Treussard.

How much less tax efficient? Brent Sullivan of Tax Alpha Insider, a tax and investment consultancy, compared the tax drag of one of the largest covered-call S&P 500 ETFs with that of the Vanguard S&P 500 ETF during the three-year period through September 30. Using Morningstar's Tax Cost Ratio, a metric that captures the impact of taxes on a fund's annualized return, he found that the tax cost for the covered-call funds was seven times higher.

"With these products, you are giving up what would be unrealized capital gains in favor of current income, which is punitively taxed," says Sullivan.

So why are these funds so popular, and how should they be used in a diversified investment portfolio? "The driving factor is investors looking for alternative sources of income," says Robert Scrudato, director of options and income research at Global X ETFs. Treussard notes that two cohorts who seek such income are baby boomers entering or in retirement and people who have made a pile of money and seek to generate good income on their wealth, even at the cost of forfeiting a large portion of expected long-term stock-market returns.

One way to address the knotty tax issues, of course, is to hold these derivative income funds in an IRA (or better yet, a Roth IRA) or other tax-deferred account. Hyman suggests a strategy of using this income in a tax-sheltered account to fund annual distributions from the account.

Those who prefer to hold the funds in a taxable account– perhaps to meet spending needs with the monthly distributions – should investigate the nature of the monthly distributions and understand how they're classified for tax purposes before investing.

For instance, the option income, depending on the type, may all be classified as ordinary income, or it may enjoy a 60% long-term, 40% short-term treatment (regardless of the holding period) under IRS rules; stock-dividend income may or may not enjoy the preferential tax rates available for qualified dividends; and some of the distribution may be a return of capital, which isn't taxed today.

With all these caveats, here are several ETFs worth exploring. All figures are as of September 30, unless otherwise noted.

JPMorgan Equity Premium Income ETF

With assets of $36 billion and mounting, the JPMorgan Equity Premium Income ETF (JEPI) bestrides the industry like a colossus. The portfolio, drawing on firmwide fundamental analysis, is an actively managed mix of about 130 securities that comanager Hamilton Reiner describes as "a more-defensive, higher-quality group of stocks – names with predictable earnings." Top positions include HVAC equipment maker Trane Technologies (TT) and Progressive (PGR), the insurance giant.

Instead of selling call options on the S&P index, the fund achieves the same goal through employing a different derivative instrument: equity-linked notes (ELNs). The fund has pretty much delivered on its stated goal of providing an annual yield of 7% to 9% with monthly distributions (the current yield is 7.8%). Those payouts are partially stock dividends but are predominantly monthly income from ELNs, which is taxed as ordinary income.

So far this year, the fund has returned 13.4%, compared with the S&P 500's 22.1%. The fund earned its spurs in parlous 2022, when it slipped only 3.5% thanks to both its conservative stock portfolio and its option income; the broad market, in comparison, plunged 18%.

JPMorgan Nasdaq Equity Premium Income ETF

JEPI’s sister fund, the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ), has garnered $17 billion in assets since its inception in 2022. JEPQ is run very similarly except that its portfolio adheres more closely to its underlying index, the Nasdaq-100, and is less actively managed.

Due to Nasdaq's higher volatility, the target yield is 9% to 11% (current yield: 9.3%). Reiner notes that JEPQ appeals to investors who want to hold growth stocks but can't take the volatility or lack of income available in the Nasdaq.

NEOS S&P 500 High Income ETF

The NEOS S&P 500 High Income ETF (SPYI) holds all the stocks in the large-company index, then sells call options on the index. The fund maintains an average option contract duration of six to seven weeks, says comanager Troy Cates. It also seeks to reduce or defer taxation through use of Section 1256 contracts (named for the IRS code that governs them) and through active portfolio tax management that includes tax-loss harvesting.

The fund aims to yield 10% to 12% (current yield: 11.7%). Its one-year return is 23%, compared with the S&P 500's 36.4%.

ProShares S&P 500 High Income ETF

Launched in December 2023, the ProShares S&P 500 High Income ETF (ISPY) is off to a strong start. Instead of selling monthly options, the ProShares fund sells daily options, which became available only relatively recently. The advantage of daily options is that besides generating premiums daily, they reset the cap on market upside daily, allowing investors to capture more of the market's gains.

"With a daily covered call, you're at bat every morning," says ProShares' Hyman. Since it launched, the ProShares offering has returned 20.5%, compared with 22.9% for the S&P.

The fund's monthly distribution tends to bounce around, but the current annualized yield is 9.1%. This year, ProShares also launched ETFs with the same daily option strategy on the Nasdaq-100 and Russell 2000 indexes.

Westwood Salient Enhanced Midstream Income ETF

The Westwood Salient Enhanced Midstream Income ETF's (MDST) energy infrastructure portfolio with an options overlay benefits from a hot midstream-energy sector, with average dividend yields of 5% to 6%.

Comanager Greg Reid says the fund writes monthly calls, on a rolling basis, on each of the roughly 25 U.S. and Canadian stocks and master limited partnerships (MLPs) in the portfolio. Since the dividend income is quite predictable, the ETF distributes exactly $0.225 per share each month, which currently equates to an annual yield of 10.4%.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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So why are these ETFs significant, and why are they tracking ethereum?

What are spot ETFs?

An ETF is an investment vehicle wrapper that complies with SEC regulations for reporting and other requirements. "Spot" means that these ETFs track the real-time "spot" price of the traded asset, as opposed to a "futures" ETF.

Like company stock, an ETF is tradeable in exchanges such as the New York Stock Exchange and Nasdaq. This is consequential because many corporates and funds are set up to trade in exchanges as they normally have accounts with broker-dealers, such as Charles Schwab, T. Rowe Price and others, who can also help them store these ETFs. 

Many corporates have been hesitant to invest in crypto due to regulatory uncertainty and custody concerns, among other reasons. Corporates may be more amenable to buying a small amount of these ETFs from their broker-dealers since they are already doing so in the normal course of business. Contrast this with crypto holders who have to fiddle with cryptographic seed phrases, software and hardware wallets, and the risk of hacks.

Why do the new ether ETFs matter?

Crypto advocates have been pushing for ETFs for years, as ETFs could open the nascent sector to corporate treasury inflows, which could be huge relative to the previous inflows, which were mostly individual retail sales.

In support of this, in 2023, the Financial Accounting Standards Board allowed for fair value accounting of digital crypto assets. This means that companies that possess digital crypto assets can reflect the rise and fall of the value of these assets in their balance sheets, whereas before, only value loss (and not gain) could be reflected. This means that if a digital asset such as bitcoin or ethereum moves counter to the price movement of other traditional assets, companies could use a small amount of digital assets in their books to offset their total asset values at the time of reporting.

Why the interest in ethereum?

Ethereum is the second-largest class of digital assets as per the industry standard price tracker CoinMarketCap. As of late August, the total crypto market cap was around $2.17 trillion, with bitcoin accounting for a little over half of that. Market cap is computed by multiplying the current spot trading price (in USD) by the total number of crypto tokens outstanding. 

Ethereum’s market cap is roughly one-fourth the size of bitcoin’s. Note that these ratios change in real time and all cryptos are volatile assets (high financial beta).

For traditional finance people, store-of-value assets, such as gold and bitcoin, are typically less favored than assets with yield, such as bonds and dividend stocks. While gold can rise and fall in terms of value, holding it does not typically produce yield. For bitcoin, although the situation has somewhat changed with new applications such as ordinals, traditionally the only thing you could do with bitcoin was keep it or sell it for a profit.

Because ethereum is capable of executing what are called smart contracts, it has become a platform for decentralized exchanges, non-fungible token markets, games and myriad other applications. 

Ethereum has native yield. The native yield of ethereum comes from the fact that all of the users of these applications have to pay ethereum “gas” fees to process their transactions on the blockchain. These gas fees are used to pay the validator server owners who keep the network running. Yield flows also allow finance people to better use their present valuation models.

Ethereum holders can do other activities including staking, liquid staking, etc., that could be likened to deposits in banks. Suffice to say, this ecosystem of blockchains and applications produces a huge “liquidity” of inflows to ethereum.

While the SEC has not allowed ETFs to do staking, which produces yield for the ETF holders, it does allow the bearers (such as corporate treasuries and traditional investors) to participate in ethereum’s future potential price growth, especially with the FASB accounting rule approval. Only holders of the actual ethereum crypto — and not ETF holders — can get the native yield, though.

What might the future hold?

While future adoption is speculative, some diehard fans believe that ethereum can eventually overtake bitcoin. Aside from the native yield that attracts investors, there is also the potential of the global traditional finance sector using a public blockchain to have a common transaction and asset ledger system. At the moment, transactions and asset ownership transfers are slow because each bank and financial institution has its own separate siloed transaction ledger database. With a common shared ledger, finance transactions could happen and settle and finalize faster.

Although there are many other chains on the market, such as Solana, and others that are competitors, ethereum is the biggest blockchain that has native yield for holders of the actual crypto and the one that traditional finance is looking at aside from bitcoin. With so many Layer 2 chains and applications, with their armies of ethereum believers, traders, developers and the like, it’s unlikely, in my opinion, that ethereum will fail and lose relevance.

For now, ethereum’s growth seems likely. SEC approval brings regulatory clarity, Gen Z increasingly is becoming more comfortable with digital assets, and slowly older generations and the global financial sector are beginning to accept them. While tech adoption is never a straight line going up, naysayers who bet against tech often end up on the losing side of the trade. 

I believe this new ethereum ETF will encourage widespread adoption even more.

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The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

If you bought into one of the new bitcoin ETFs within the first few weeks of their January 10 approval by the Securities and Exchange Commission, congratulations! In the six months that ended July 31, the median return for the first 10 funds that invest directly in bitcoin was 53.5%. 

Nine of the 10 have nearly identical returns, ranging from 53.7% by Franklin Bitcoin (symbol EZBC) to 53.3% for Fidelity Wise Origin Bitcoin ETF (FBTC). All 10 trounced the 14.8% return of the S&P 500 over the period. (Bitcoin itself was up some 52%, measured by closing prices. Funds buy throughout the day, which accounts for some of the discrepancy.)

If you waited a few months and jumped into the bitcoin pool at the end of March, condolences. You’re down about 7% over the past four months; investors in the S&P 500, meanwhile, gained 5.5%. 

The similarity in the funds’ performance is not surprising, considering that expenses are also (mostly) comparable. Franklin’s fees are 0.19%; three of the ETFs currently charge 0.25%. 

The outlier is the first bitcoin fund, Grayscale Bitcoin Trust (GBTC), charging 1.5%. Its six-month returns appear to lag significantly, but it’s important to note that on July 30, Gray-scale converted 10% of its shares into shares of its newly issued Grayscale Bitcoin Mini Trust (BTC), which has a low expense ratio of 0.15%. Investors in the original fund received shares in the new ETF, and the original fund’s returns were reduced by the spin-off. Prior to the spin-off, the Grayscale Bitcoin Trust’s returns were at the rear of the pack, but still competitive. 

Buying stampede. Despite the funds’ volatility, investors have poured a cumulative $17.5 billion into digital-currency ETFs so far this year, according to fund research firm VettaFi. The iShares Bitcoin Trust (IBIT) has become the single most successful ETF launch in history, rising from nothing to $21.5 billion in assets in seven months. 

The flow of dollars has sparked the launch of other cryptocurrency funds. On July 22, the SEC approved eight ETFs that invest directly in the second-largest digital currency, ethereum.

Crypto funds can add a little diversification to portfolios and give intrepid investors an easy way participate in the growth of new financial technologies, says Aniket Ullal, head of ETF data and analytics at CFRA Research. But he warns that cryptocurrencies are more than twice as volatile as the S&P 500, and they aren’t a perfect counterweight to stocks. Bitcoin plunged along with stocks in 2022, and struggled in this year’s summer sell-off.

Even the most enthusiastic cryptocurrency investors should pay close consideration to basics such as cost and volatility, says Bryan Armour, head of index fund and ETF research at Morningstar. He suggests keeping an allocation to crypto below 3% of portfolio holdings. “And if investors are wary of or don’t understand crypto, it’s completely okay not to invest,” he says. “Fear of missing out is never a good investment strategy.” 

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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Healthcare remains an attractive sector, although it doesn't move as one block. On the plus side, an ongoing post-COVID ramp-up in patients getting surgery and treatment is boosting health-facility stocks. 

Weight-loss drugs and their potential to treat other ailments could lift earnings for key drug players for years. The sector even has an artificial intelligence angle, from accelerating drug research to precision medicine therapies. And though aging demographics is an old story, it remains a growth driver for the sector. 

Why we chose the Health Care Select Sector SPDR ETF

Last month in the Kiplinger ETF 20, our favorite cheap ETFs to buy, we replaced the Invesco S&P 500 Equal Weight Health Care ETF (RYH) with State Street Global Advisor's Health Care Select Sector SPDR Fund (XLV). Both funds hold the same 63 healthcare stocks, but the Invesco fund gives equal stakes to each firm and gained 5.9% over the past 12 months; the SPDR ETF weights each holding by market value and advanced 13.3%. 

Size helped over the past year, and we think that trend will continue. Just 15 health stocks beat the S&P 500 over the past 12 months, and most rank among the largest by market cap. Sector heavyweight Eli Lilly (LLY) soared 78% over the past 12 months; biotech giants Regeneron Pharmaceuticals (REGN) and Amgen (AMGN) gained 45% and 46%, respectively. 

By contrast, the rest of the sector was a drag. More than 20 stocks lost value over the past year, led by DexCom (DXCM), down 45%, which makes devices for people with diabetes. 

Investors can expect the U.S. presidential election to inject some choppiness into health shares. Firms with strongholds in their businesses and heaps of cash on their balance sheets can best navigate that challenge, say BofA Securities analysts. 

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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If you want your AI investing to pay off over the long term, you need to have a solid understanding of your options before allocating any of your resources. You want to study the industry, your investment avenues and key considerations such as illiquidity and creditworthiness.

Let’s explore the unfolding world of AI and how to make informed decisions as you invest through mutual funds, exchange-traded funds (ETFs) and individual companies.

Recognizing AI's investment allure

Let’s start with the obvious: AI is exciting. Its allure is drawing billions of investment dollars — and with good reason. AI is the real deal. AI is rapidly transforming industries, and the investment world is no exception.

In my time working at the Fintech Finance Group, we’ve never seen an industry-changing technology with quite this degree of potential. From composing text and making personal suggestions to driving the Fourth Industrial Revolution, this technology is touching every part of life as we know it.

As an investor, it’s easy to see how this exciting new frontier offers significant potential returns. As AI technology continues to disrupt markets, its near-limitless utility means it may be a good time to invest in this growing area. 

With that said, investors should remember that AI is a relatively young field — and as is the case with any fledgling market, there are inherent risks involved. That means you want to make informed investments, maintain exit strategies and remember to stay diversified.

Considering AI investing avenues

Believe it or not, Nvidia (NVDA) isn’t the only AI company out there. I kid, but I hope you see the point. There are multiple ways you can gain exposure to AI’s profit potential in your investment portfolio, and at this point, many of these alternatives may have more upside than Nvidia and its bloated market value.

The obvious avenue here is to invest directly in publicly traded companies. Yes, Nvidia is one of these. But there are many other AI-focused brands, such as Microsoft (MSFT), Alteryx (AYX) and Palantir (PLTR), that are applying bleeding-edge AI technology in a variety of industries and functions.

In theory, each of these has the potential for high returns. However, you want to conduct in-depth research with every company to understand their market position and what sets their technology apart. Consider how established they are and how each company’s risk level affects your portfolio’s overall stability.

You can also invest in AI using ETFs and mutual funds. These represent collections of AI-related companies, naturally spreading out both risk and reward. This provides a lower barrier to entry for investors with less capital and can make it easier to “set and forget” your artificial intelligence investments for the long term.

Going beyond the headlines

Along with each individual investment channel, you want to consider the nuances of AI investing currently. For example, illiquidity is particularly relevant to private company investing. 

How easily can you sell the shares of each AI company that you invest in? If they’re publicly traded, this could be no issue. If you’re an angel investor or venture capitalist getting in on the action early, though, you may have a tougher time exiting a position.

You also want to evaluate creditworthiness if you’re directly loaning money to AI startups and smaller companies. Is there a clear timeline for the borrower to eventually repay the loan (with all due interest)?

Making informed decisions

If you want to invest in AI successfully, you must grasp both the potential reward and the inherent risk that comes with each opportunity. Do your research. Stay aware of your risk tolerance. Make sure your portfolio stays diversified. Keep your investment goals top of mind.

If you find your portfolio is lopsided, or you aren’t sure about the risk-reward of an AI investment opportunity, remember to consult with a qualified financial adviser. They can provide insights that are particularly invaluable when you are venturing into new investment territories such as the promising but precarious AI revolution.

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But we've noticed something about the JPMorgan U.S. Quality Factor (JQUA) fund, a member of the Kiplinger ETF 20, our favorite cheap ETFs you can buy. The exchange-traded fund has kept pace with the S&P 500 index over most time frames, and it has been a smidge less volatile. Over the past five years, the fund's 13.3% annualized return eked past the 13.2% gain in iShares Core S&P 500 (SPY), an S&P 500 index ETF, with less volatility.

What's the difference between the two funds? The iShares ETF holds all of the large-company stocks in the S&P 500, which are picked by a committee at S&P Dow Jones Indices. The selection process favors companies that meet certain criteria, such as company size, positive earnings and a sufficient percentage of shares available for public trading. 

But JPMorgan U.S. Quality Factor ETF holds just 250-odd stocks and starts with a broader index, the Russell 1000, which means more midsize firms are in the mix. Companies in the Quality Factor fund have an average market value of $112 billion, according to financial data firm Morningstar. (By contrast, stocks in the Core S&P 500 ETF have an average market value more than double that, $278 billion.) 

Finally, companies in the Quality Factor ETF must pass muster for a variety of profitability criteria (such as return on equity), solvency (such as cash flow relative to debt) and earnings quality (such as the ratio of a firm's balance sheet to its average total assets over the past year). 

Despite their differences, the two funds share similar top-10 holdings, including some of the usual suspects: Meta Platforms (META), Alphabet (GOOGL), Nvidia (NVDA) and Microsoft (MSFT). But about one-third of the holdings in U.S. Quality Factor ETF aren't in the S&P 500 index. Some of those stocks, including home goods retailer Williams-Sonoma (WSM) and cybersecurity software maker CrowdStrike Holdings (CRWD), have more than doubled in price over the past 12 months. 

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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And these funds are growing in popularity. The first defined-outcome ETF launched in 2018. Today, there are more than 200 funds, with $43 billion in assets under management, according to ETF.com.

Interest in buffered ETFs ramped up after both stocks and bonds turned in terrible returns in 2022, and investors sought ways to build some defense into their portfolios. But the ETFs also appeal to risk-averse investors who want to keep a toe in the stock market.

Word is, recent and soon-to-be retirees, who are staring down a possible 30-year stretch for their money to last, are interested.

"You can't maintain your standard of living for that long without earning equity-like returns," says Matt Collins, head of ETFs at PGIM Investments. "Some are willing to take some risk to get that exposure, but not a lot. And if you can offer them a narrower range of outcomes, it gets them a little closer to being comfortable with exposure to large-company U.S. stocks."

Buffered strategies aren't new. These approaches have existed for years in mutual funds and in annuities and other products sold by insurance companies. But the ETF versions are accessible to all investors.

Innovator and First Trust were the first firms to offer buffered ETFs; AllianzIM, Pacer and TrueShares entered the market in 2020 and 2021. More-recent joiners include iShares, PGIM Investments and Fidelity.

What are buffered ETFs exactly?

Trouble is that these actively managed strategies require a lot of explaining. They're not typical stock or bond funds. In fact, they're something in between, more like alternative investments.

"Investors need to reach a level of understanding to make sure they have the right expectations," says Ryan Issakainen, First Trust’s ETF strategist. That’s part of the reason the bulk of defined-outcome ETF buyers these days are financial advisers who purchase them on behalf of their clients, not individual investors. And that might be a good thing.

Buffered ETFs come in a variety of risk-reward combinations. The majority offer a certain cushion on losses over a 12-month stretch in exchange for a give-back on gains. But others tweak the formula: Some allow you to capture more of the stock market's gains; others focus on downside protection. ETFs that let you hedge against stock losses and guarantee a payout — sort of like a dividend — have recently joined the mix, but we’ll address them at some other point (stay tuned).

"There's a super-wide array of ways to use these products," says Graham Day, chief investment officer at Innovator ETFs. "They can be used as a complement to a stock portfolio, other times as bond alternatives, or other times as an alternative-investment sleeve" that zigs when other parts of your portfolio zag.

Over the next few paragraphs, we'll explain how these funds typically work, walk you through the broad types of strategies available, and discuss their pros and cons. We've focused on ETFs for stock investors here. Returns and data are through February 3.

How do buffered ETFs work?

Most buffered ETFs are linked to the S&P 500 index of the biggest U.S. companies. The fund managers define how much protection to offer on the downside (the buffer) and set the limit on upside returns (the cap) by investing in options contracts, which allow them to buy or sell shares in an S&P 500 ETF at a set price on or before a certain date.

The most common type of buffered ETF has a 12-month outcome period. The range of returns possible over the period is defined by the options contracts the fund holds. At the end of the one-year period, the ETF rebalances by buying new options to ensure the promised buffer, which in turn resets the cap for the next 12-month period.

Typically, the downside protection is fixed, depending on the strategy, but usually ranges between 10% and 20%. How much you give up in upside gains depends in part on the amount of protection the fund offers. The bigger the down-market cushion, the smaller the potential gain. Market volatility and interest rates affect how high or low the cap on gains will be, too.

Here's an example. The Innovator S&P 500 Buffer ETF April (BAPR) aims to track the SPDR S&P 500 ETF Trust (SPY).

Investors who bought shares in BAPR at the start of April 2024 have a 9% buffer against losses. That means if SPY drops anywhere up to 9% over the 12-month period ending in March 2025, shareholders lose nothing. But losses beyond 9% are not protected. If SPY declines, say, 15% by the end of the 12-month period ending in March 2025, shareholders who bought BAPR in early April 2024 will suffer a 6% loss.

On the flip side, the potential 12-month return of the Innovator S&P 500 Buffer April ETF tops out at 18.3%. Any gains beyond that are forfeited. "These products do exactly what they say they're going to do," says Innovator’s Day. "That level of predictability – knowing what you’re going to get – is enormously powerful."

The pitfalls of buffered ETFs

Naturally, these strategies come with some caveats. Cost is one. Buffered ETFs charge an average expense ratio of 0.78%. That’s more than the typical 0.59% fee for actively managed diversified U.S. stock ETFs.

You need to time your purchase, too. It’s best to buy these funds within a week of the start of its 12-month stretch, just when the fund rebalances. In late June or early July, for instance, you’d buy a July-dated buffered ETF.

And plan to hold the ETF for at least the full year. For investors who don't buy at the start of the outcome period, the buffer and cap will shift depending on the broad market’s moves and the fund’s net asset value each day. It’s why you see these strategies issued in monthly varieties: Fund firms want to give investors buy-in options through-out the year. That said, these funds aren’t time deposits. You can get out at any point.

Finally, the buffer and the cap on any given ETF apply to its full outcome period. The outcome period of the April series of Innovator S&P 500 Buffer ETF is April 1, 2024, to March 31, 2025. If you’re buying and holding the fund, what happens in the interim is immaterial. All that matters is where the market stands at the end of the outcome period.

That’s what makes an investment in buffered ETFs more akin to a one-year bond you hold to maturity. "What we say we will deliver in a January defined-outcome ETF won't happen until December 31 – 12 months later," says PGIM's Collins. "And it’s a slow grind."

At the end of the 12-month period, when the fund rebalances by buying a new set of options, you may want to consider what to do next with the money in the fund. You can always do nothing. In that case, your assets will remain in the fund and automatically roll over to the next year-long period. But it's a good idea to review the new outcome parameters for the coming year. "That ongoing monitoring of the caps from year to year is something you have to stay on top of," says Collins.

Where to find the best buffered ETFs

The S&P 500 isn't the only index to get the buffered treatment. Innovator and First Trust offer defined-outcome ETFs tied to the Nasdaq index of stocks, the MSCI EAFE (which tracks foreign stocks in developed countries), the MSCI Emerging Markets Index for emerging market stocks and the Russell 2000 (a benchmark of small-cap stocks). Generally, those ETFs work in the same way as the 12-month defined-outcome funds that track the S&P 500.

But other twists of the defined-outcome formula are worth highlighting:

More upside. Some funds don’t come with caps on potential returns, which may appeal to investors more interested in growth than downside protection. For example, instead of accepting a percentage-point limit on potential returns, investors in TrueShares Structured Outcome ETFs can expect to reap roughly 75% to 80% of the S&P 500’s price returns over any given 12-month period – no matter how high the index climbs.

For example, the TrueShares Structured Outcome January ETF (JANZ), which has a 12-month outcome period that starts in early January, returned 18.1% in 2024, or nearly 73% of the S&P 500's 25.0% price return. "Over the long run, what you miss on the upside is as equally damaging to a portfolio as a drawdown," says Michael Loukas, chief executive of TrueMark Investments, the firm behind TrueShares ETFs. The TrueShares Structured Outcome ETFs aim to offer downside protection of 10%.

Industry insiders call these strategies "uncapped" defined-outcome ETFs. In the uncapped version from AllianzIM, investors give back the first three percentage points of gains but pocket any advances beyond that. So if the broad market climbs 4%, you earn 1%, but if the market rockets 50%, you make 47%. The firm's first uncapped defined-outcome ETF, AllianzIM U.S. Equity Buffer 15 Uncapped Appreciation (ARLU), launched in March and offers a 15% buffer on losses.

A bigger cushion. Almost all buffered ETFs offer some downside protection, but most won't fully protect against severe bear markets. There are exceptions, but they're relatively new, so they have little track record.

Among the exceptions is a group of funds from Innovator called Equity Defined Protection ETFs. They aim to offer 100% protection against losses, before fees and expenses, for two years. The price for that protection, of course, is a lower potential return. The oldest of these funds, Innovator Equity Defined Protection ETF 2 Year to July (TJUL), launched in July 2023, and the maximum return that investors can expect over the two-year period is 16.6%, cumulative, before fees.

AllianzIM shrinks the outcome period, which can work in your favor in up markets. For example, the AllianzIM U.S. Large Cap 6 Month Floor5 April/October (FLAO) limits losses to no more than 5%, but it rebalances every six months. There's still a cap on gains. For investors who bought the April/October fund when it reset in early April, the gains are capped at 8.31%. AllianzIM's two uncapped funds launched this year, so they have almost no track record. We'll keep our eye on them.

An all-in-one. Some firms roll a series of monthly defined-outcome ETFs into one fund. But the end result is a less predictable outcome. "The fund of funds ETF doesn't offer a defined outcome, but the underlying holdings do," says First Trust's Issakainen. "You end up with something a little different, but ultimately the ETF is less volatile than the overall market, and that's what it's supposed to be."

First Trust's FT Vest Laddered Buffer ETF (BUFR), for instance, holds 12 defined-outcome ETFs – spanning 12-month holding periods starting in January through December – in equal stakes. All of the underlying funds offer a 10% buffer against losses in the S&P 500. The caps on gains range between 12.7% and 16.9%.

The Pacer Swan SOS Fund of Funds ETF (PSFF) takes a more active approach, opportunistically buying and selling monthly funds depending on market conditions. "If the market goes up a lot, the managers might sell a monthly series to move to a new series and increase their cap and bring the buffer up," says Sean O'Hara, president of Pacer ETFs.

Our verdict: These funds are solid low-volatility stock strategies. In 2022, when the S&P 500 lost 18.1%, the First Trust fund of buffer ETFs lost 7.7%; the Pacer fund, just 4.0%. But if predictable outcomes are what you seek, a fund of funds may not be the best option.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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ETFs are designed to track various industries or investment strategies and can contain a variety of investments, including stocks, bonds, cash equivalents or commodities. They’re a popular alternative to mutual funds, despite the similarities between the two investment vehicles.

ETF vs mutual fund: What’s the difference?

At the base level, ETFs and mutual funds act in much the same way. Both are designed to allow an investor to benefit from ownership in multiple securities as part of a single investment. So, instead of owning shares of one company or stock, the investor buys shares of a fund that is made up of a basket of different investments. Owning a diverse set of investments minimizes your risk of being overexposed to a specific stock or bond. Both ETFs and mutual funds are also highly liquid, meaning you can generally buy and sell them easily.

While the first exchange-traded fund launched 30 years ago, traditionally most strategies focused on investing in passive baskets that tracked a broad-based index. Active ETFs were slower to develop. An important ruling from the SEC in 2019 helped revive interest in active ETFs. The SEC's updated regulations allowed for actively managed ETFs to create custom portfolios that had the potential to outperform the market like open-ended mutual funds. Perhaps most importantly, the new rules offered a more straightforward path for ETFs to be approved by regulators, making it simpler to create and launch ETF products.

Some pros of owning ETFs

There are many potential benefits to investing in ETFs. Unlike mutual funds, which are available for trading only at the end of each market day, ETFs allow investors to react to market activity by buying or selling shares in real time. In addition to intraday trading, ETFs are increasingly attractive to investors because they are:

Transparent: Holdings of an ETF are disclosed in real time, which allows investors to make more educated decisions about their potential performance. Many mutual funds only disclose holdings on a monthly or quarterly basis.

Tax efficient: Capital gains-triggering events in an ETF are generally limited to when the investment is liquidated — as opposed to a mutual fund, which passes on the cost of trading the underlying investments in the fund in taxable earnings.

Cost effective: ETFs generally have lower fees relative to mutual funds due to their structure.

As a result, active ETFs have experienced meteoric growth in the U.S. and now account for more than $8 trillion in assets under management (AUM). Since active ETFs first launched, they’ve been growing rapidly in popularity — both from a fund launch and fund flows perspective. Since 2021, over 60% of ETF launches have been active. Active ETF flows continue to meaningfully outpace overall ETF flows on a percentage-of-AUM basis.

Some potential cons that come with ETFs

Despite their advantages, there are also considerations when exploring ETF investing. While ETFs offer the flexibility to trade intraday, they can be subject to disadvantageous spreads — the difference in the price to buy and sell a share of the fund. That’s different from a mutual fund, which will always trade according to the net asset value of the shares being traded.

Additionally, some ETFs can be difficult to trade, depending on the underlying investments in the fund and any existing market activity.

Ultimately, investing in an ETF doesn’t mean you need to leave mutual funds behind. You can use both as effective alternatives to direct investing in individual stocks or bonds, and both can have a place in a successful portfolio.

Whether investing in mutual funds or ETFs, often the most favorable outcomes result from combining active and passive investment strategies in your portfolios. That’s because active strategies have tended to benefit investors more in certain investing climates, and passive strategies have tended to outperform in others. A financial adviser can help determine a proper investment allocation and selection for your goals.

Price for performance

There can be no debating that actively managed ETFs are a growing force in the investment space — particularly in the post-pandemic time period. As stock market growth slowed during the pandemic, many investors chose to shift to the versatile intraday trading style of an ETF. Additionally, the opportunity to have an investment manager prepared to react to market volatility and inflation stresses of the last few years has contributed to the spike in ownership of active ETFs.

Whether you choose an active or passively managed ETF, or even whether to invest in an ETF at all, will depend on your overall investment goals:

Passive ETFs will invest according to the index or commodity they are designed to track, making for more predictable returns.

Active ETFs will likely provide a better opportunity to outperform the market as the fund manager makes adjustments based on market activity. But you’ll have to pay for that potential in the form of higher management fees.

ETFs are growing in popularity and offer convenience and the potential to outperform the market. If an ETF fits your individual investment strategy, having a conversation with your financial adviser can help determine whether your risk tolerance, appetite for fees and performance goals can be best achieved through a passive or actively managed fund.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Earlier this year, that appeared to be going in reverse after Fidelity Investments announced plans to introduce a $100 "surcharge" on certain ETF trades. It wasn't, strictly speaking, a trading commission, but for all intents and purposes, it might have been considered one. 

Investors likely wouldn't have noticed a difference, as the charge was going to being levied on only nine ETF issuers, none of which are in the top 50 by market share. These are smaller, more obscure ETFs that you probably weren't likely to buy anyway. The ETF issuers affected were Adaptive, AXS Investments, Cambiar, Day Hagan, Rayliant, Regents Park, Running Oak, Simplify Asset Management and Sterling Capital.

However, Fidelity has since reached agreements with these issuers and dozens of other providers of exchange-traded funds. The firm is also in constructive dialogue with many others. As a result, no service fees will be incurred at this time.

As a Fidelity spokesperson told Kiplinger, "Fidelity remains committed to providing clients choice through an open architecture investment platform. The arrangements we have with asset managers help us uphold the platform and the exceptional value it provides for all products, including customer service, research tools, technology capabilities, and security measures to drive a positive experience for investors."

Fidelity adds that the "decision to harmonize some of our fee policies comes as our level of support and service for ETFs across the industry is growing rapidly. We continue to work closely with asset managers, as we've always done, to engage in constructive dialogue and reach outcomes that reflect a more consistent approach across mutual funds and ETFs. Fidelity provides transparency to investors for commissions, margin rates, and fees at Fidelity.com."

Still there are implications here for investors, and the incident reveals a lot about the "pay to play" incentive structure of the brokerage industry. 

Let's dig deeper.

 Why would Fidelity consider a surcharge?  

Mutual funds have always paid for the privilege of being available on brokerage platforms. Whether by sales loads or 12b-1 fees, mutual funds have traditionally incentivized brokerage firms to carry their offering and individual stock brokers and advisers to sell them. 

A sales load is a commission that comes off the top of an investment. For example, if a mutual fund charges a 5% load, you're really only investing 95 cents on the dollar, with the other 5% going into the broker's pocket. Loaded mutual funds have really fallen out of favor. Recent research from the Investment Company Institute found that 92% of mutual fund sales by dollars invested went into no-load funds. 

Another industry trick is the 12b-1 fee. This is, in effect, a trailer the broker gets for every year the client continues to hold the fund. In theory, this incentivizes the broker to hold on to the fund instead of churning the account in pursuit of new commissions. But it's still money flowing out of the pocket of the investor and into the pocket of the broker. 

ETFs have long been touted as cheaper alternatives to traditional mutual funds, and for the most part this is true. There are no loads for ETFs, as they trade like stocks and thus enjoy free or nearly free trading commissions at most brokerage houses. And because ETFs are often index funds and have very limited trading expenses, they can' charge very low internal expenses. The expense ratio on the popular iShares Core S&P 500 ETF (IVV) is just 0.03%, for example, meaning that for every $1,000 you invest, you lose just 30 cents in fees per year. 

And here's where pay to play comes into effect. 

Despite the fact that ETFs trade on stock exchanges just like stocks, some brokers have "maintenance arrangements in place" in which the ETF managers share a portion of their management fees with the broker for the privilege of having the ETFs available at the broker. In the case of Fidelity, the company is asking for 15% of the fees collected by the managers. For the ETF managers that didn't take the deal, any service fee would be limited to 5% of a buy, up to $100.

 What does this mean for investors? 

It seems that no matter how many fiduciary rules the regulators put in place, there are always going to be incentives for brokers and managers to act against the interests of their investors. Management fees on mutual funds and ETFs have really come down over the past few decades to the point that a large ETF like IVV can charge just 0.03% and still turn a profit for the manager. 

But if fees are the start of a new trend in the industry, then it's likely that the overall cost to clients could rise. If the ETF managers have to pay the broker a cut, they will have less revenue to cover their costs and pay their staff. As a practical matter, that likely means they'll need to charge higher fees.

Another unintended consequence is that fees could strengthen the large, existing players in the industry and penalize smaller upstarts. This would potentially reduce the available options to the investor and reduce competition.

In the bigger picture, the takeaway may be that the great, multi-decade trend toward lower and lower fees to investors could hit the end of the line at some point in the near future. This doesn't mean we'll be going back to the pre-1974 days of ridiculously expensive fixed commissions, of course. But at the margin, it does mean a little less money in investors' pockets. 

Editor's Note: This article initially stated that based on a hypothetical $100 service fee, "you could buy a single share of an ETF for $50 and then pay a 200% commission on that purchase in the form of the $100 surcharge" and that ETFs of issuers who did not reach an agreement with Fidelity would be "subject to a $100 surcharge." This is not accurate. Any service fee would be limited to 5% of a buy, up to $100. This article has also been updated to reflect that Fidelity has reached agreements with these issuers and dozens of other ETF providers.

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Similar trends appear across most equity categories: mid- and small-cap funds, value and growth styles, and even international equities, where long-term active underperformance remains the norm. While fixed income has shown some short-term advantages for active managers, consistent outperformance over longer periods remains elusive.

And yet, while active mutual funds struggle, the active exchange-traded funds (ETFs) category continues to grow rapidly in both product count and inflows. As of August 29, the ETF Central screening tool showed that out of roughly 4,475 U.S.-listed ETFs, with nearly half (2,156) now classified as active.

This growth is driven by multiple factors: strong demand from advisors and institutions, ongoing conversions of mutual funds and separately managed accounts (SMAs) into ETFs, and the growing number of active ETFs with fee structures increasingly competitive with passive counterparts.

That said, active ETFs are still harder to analyze at a glance. Unlike index-tracking funds, which publish detailed methodologies and holdings tied to transparent benchmarks, active ETFs may rely on proprietary strategies that aren’t always easy to unpack.

So how do you decide which active ETFs are worth it? Here’s how to start your analysis, and a few standout funds to consider.

The ins-and-outs of active ETFs

An active ETF is one where the portfolio manager isn't trying to replicate a transparent, rules-based index. Instead, they're building and managing the portfolio using their own proprietary process, which may be driven by a quantitative model, a qualitative strategy, or a mix of both.

To understand this better, put yourself in the shoes of a fund manager. Suppose you want to launch a large-cap U.S. equity ETF. If you go the passive route, you'd typically license an index like the S&P 500. Your job then becomes replicating that index as closely as possible. Your ETF's returns will generally mirror the benchmark's, minus fees and tracking error.

If you go the active route, the S&P 500 may still be your benchmark for measuring performance, but it's not your playbook. Instead of following the index's rules, you’re selecting stocks based on your own methodology and making buy/sell decisions accordingly.

It's helpful to think of active management as a style that can be applied across all asset classes, not just equities and stock-picking:

• Bonds: Active fixed income managers may overweight or underweight duration, credit risk, or sectors based on macro conditions or proprietary credit models.
• Commodities: Active commodity ETFs might tactically shift exposure between energy, metals, and agriculture based on supply-demand trends or inflation forecasts.
• Options: Many active strategies use covered calls, put spreads, or tail-risk hedges to generate income or reduce downside volatility.

Across asset classes, most active ETFs share three key characteristics:

• Greater opacity: Active managers often treat their "secret sauce" as proprietary, and some strategies operate as a black box, meaning you won't know the specific selection rules. A subset of active ETFs are actually semi-transparent, which means they disclose holdings on a delayed basis or use proxy portfolios to protect their strategy from being copied or front-run.
• Higher turnover: Active ETFs tend to trade more frequently than index-based funds, as managers respond to market conditions, valuation changes, or risk factors. Thanks to the ETF structure, though, in-kind creation and redemption generally limits taxable capital gains distributions, which is a major advantage compared to active mutual funds.
• Manager dependency: Unlike index ETFs, where rules are automated, active ETFs depend on human judgment. This introduces the possibility of manager-driven underperformance, or, if done well, outperformance. But it also means personnel changes can materially affect the strategy, especially if a star manager steps down without a good succession plan.

While some active ETFs do outperform, picking them in advance is difficult. There’s a real risk of hindsight bias (choosing winners after the fact) and survivorship bias (ignoring the many funds that underperformed or shut down). For example, it’s easy to highlight a tech fund that beat the Nasdaq, but dozens of similar ones may have quietly lagged and disappeared.

Sticking with an active ETF long-term requires vigilance. If a benchmark index changes for a passive fund, the update is public and well-documented. With active funds, you need to watch for style drift. This is when a fund gradually moves away from its original investment style and objectives. This can happen quietly, and without clear disclosure.

A good rule of thumb with active ETFs: you’re buying the manager, not just the ticker. Factors like manager tenure, track record, and team stability matter. If a lead portfolio manager retires or leaves for another firm shortly after you invest, the fund’s entire philosophy and execution could change.

How we chose the best active ETFs to buy

Specifically, we focused on Morningstar 5-star rated ETFs, which represent the top 10% of funds in their peer group based on risk-adjusted performance.

That last part is crucial for active strategies, where higher returns may mask excessive volatility or risk-taking.

To further narrow the field, we set a strict expense ratio cap of 0.50%. While active ETFs often cost more than index funds, fees still eat into long-term returns and compound over time.

By limiting expenses, we aimed to identify funds that deliver strong performance without overcharging for it.

Finally, we focused on product viability. While some ETF analysts use $50 million in assets as a minimum threshold for long-term survival, we raised the bar to $1 billion in assets under management (AUM).

This standard helps ensure that the strategies we highlight have real traction with investors.

JPMorgan Nasdaq Equity Premium ETF

• Assets under management: $29.2 billion
• 30-day SEC yield: 10.0%
• 3-year annualized return: 18.37%
• Expenses: 0.35%, or $35 annually for every $10,000 invested

The JPMorgan Nasdaq Equity Premium ETF (JEPQ, $55.78) is one of JPMorgan Asset Management’s most widely held active ETFs, combining modest fees with a distinctive strategy managed by Hamilton Reiner.

The fund selects stocks from the Nasdaq-100 Index with a slight defensive tilt, then allocates roughly 15% of the portfolio to equity-linked notes. These notes replicate the return profile of a one-month, out-of-the-money covered call on the Nasdaq-100.

This caps upside potential but allows the ETF to generate significant option premium income, capitalizing on the index’s historically elevated volatility. While the income is largely taxed as ordinary income, the yield is among the highest in the category.

The combination of active equity selection and a structured options overlay has earned JEPQ a 5-star Morningstar rating within the derivative income peer group.

Learn more about JEPQ at the JPMorgan provider site.

Capital Group Growth ETF

• Assets under management: $15.2 billion
• 30-day SEC yield: 0.14%
• 3-year annualized return: 25.62%
• Expense ratio: 0.39%

Among Capital Group's recent offerings, Capital Group Growth ETF (CGGR, $42.88) has quickly gained traction thanks to standout performance and a reasonable fee structure.

Capital Group is one of the largest active managers globally, with a long history spanning mutual funds, separately managed accounts, and now a growing presence in ETFs.

CGGR follows Capital Group’s "Capital System" of management, where a team of seven portfolio managers independently runs segments of the fund based on their highest-conviction ideas.

This structure promotes diversification across management styles and mitigates risks like style drift or manager turnover often associated with single-lead active funds.

While CGGR doesn’t disclose its growth screens, it maintains a relatively concentrated portfolio of 102 holdings and can allocate up to 25% to international equities.

Its low distribution yield supports tax efficiency, while the 0.39% expense ratio remains competitive within the active equity space.

Learn more about CGGR at the Capital Group provider site.

Capital Group Dividend Value ETF

• Assets under management: $21.2 billion
• 30-day SEC yield: 1.44%
• 3-year annualized return: 23.68%
• Expenses: 0.33%

Unlike rules-based dividend strategies, the Capital Group Dividend Value ETF (CGDV, $41.33) management team's active approach enables the portfolio team to target companies that may not meet traditional screens for dividend yield or dividend growth but still offer attractive income potential.

The fund's objective is broadly framed as seeking consistent income that exceeds the average yield of the S&P 500, with an emphasis on companies that currently pay or have the potential to initiate dividend payments.

This means the ETF won’t miss out on otherwise low-yielding tech stocks that have nonetheless delivered strong dividend growth and fundamentals.

As with other Capital Group ETFs, CGDV employs a concentrated approach, with just 52 holdings and allows up to 10% in non-U.S. stocks.

While the specific selection process isn't disclosed, the portfolio skews large-cap and features exposure across all 11 GICS sectors, with a notable tilt toward technology and industrials.

Learn more about CGDV at the Capital Group provider site.

Avantis International Equity ETF

• Assets under management: $8.7 billion
• 30-day SEC yield: 2.55%
• 3-year annualized return: 17.98%
• Expenses: 0.23%

International investing doesn't have to rely on traditional market-cap weighted passive indexing, and the Avantis International Equity ETF (AVDE, $77.26) is a strong example of what's possible with a different approach.

The fund is one of many from Avantis Investors that applies a quantitative, factor-based methodology, tilting toward smaller, undervalued, and profitable companies within its investable universe.

AVDE is benchmarked to the MSCI World ex USA IMI Index and has consistently outperformed it over the trailing one-, three-, and five-year periods, as well as year to date in 2025.

That performance reflects both Avantis' disciplined methodology and the fund's low expense ratio, which helps reduce long-term drag. The firm offers similar strategies for other market segments.

Learn more about AVDE at the Avantis provider site.

Principal U.S. Mega-Cap ETF

• Assets under management: $3.4 billion
• 30-day SEC yield: 0.99%
• 3-year annualized return: 20.98%
• Expenses: 0.12%

The Principal U.S. Mega-Cap ETF (USMC, $65.46) is one of the most cost-effective options for gaining large-cap core equity exposure with an active strategy.

It even charges less than some passive index-tracking ETFs. The fund uses a rules-based, proprietary approach that results in a concentrated portfolio of just 26 stocks, with a 50.3% active share versus the S&P 500 index.

USMC’s methodology begins by screening the top 50% of S&P 500 companies by market cap. From there, the largest 10% are weighted by market capitalization, while the remaining 40% are weighted using Principal’s internal financial strength score.

The result has been strong relative performance, with the ETF outperforming the S&P 500 over the trailing one-, three-, and five-year periods.

Learn more about USMC at the Principal provider site.

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The January 2024 approval of 11 spot bitcoin ETFs was a watershed moment, presenting investors with a gateway to being able to invest in bitcoin through their traditional investment accounts. We expect this will continue to boost broader investor adoption of bitcoin and attract investors who previously did not want to open a digital wallet or a digital asset custodial account. The approval of 11 products all at once can seem overwhelming, so the following guide can be used as a tool for investors who are interested in adding these types of investments to their portfolio.

Understanding spot bitcoin ETFs

An exchange-traded fund (ETF) is a type of pooled investment security that can be bought and sold much like an individual stock. The main difference between an ETF and a mutual fund is that though a mutual fund is also a pooled investment, it trades only once a day after markets close. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be designed to track specific investment strategies.

A spot bitcoin ETF is a breakthrough financial vehicle that tracks the current price of bitcoin, providing a simplified investment approach without the complications of direct ownership. In contrast to mutual funds that trade once at the end of the day, these ETFs operate similarly to stocks, allowing for real-time trading, adding flexibility to investment strategies.

Spot bitcoin ETFs operate by securing and holding actual bitcoin, stored in secure digital wallets by custodians. These custodians play a crucial role in safeguarding assets, employing sophisticated security measures such as cold storage to mitigate theft risks.

Bitcoin trades 24/7 throughout the world, but remember, the 11 spot products that were approved will trade only when markets are open, even though their underlying investment will be trading all of the time. For example, if you are looking at the spot price on a weekend, you will not see the ETF price changing until markets open the coming week.

A closer look at the approved spot bitcoin ETFs

The selection of SEC-approved spot bitcoin ETFs comes with various expense ratios and fees, tailored to meet different investment profiles. To entice investors, some offer limited-time fee waivers or reductions. Some of those ETFs include:

• ARK 21Shares Bitcoin ETF (ARKB). No fees for six months, until hitting $1 billion in assets.
• Fidelity Wise Origin Bitcoin Trust (FBTC). Fees waived until July 31, 2024.
• Franklin Bitcoin ETF (EZBC). No fees until August 2, 2024, or until reaching $10 billion in assets.
• Invesco Galaxy Bitcoin ETF (BTCO). Zero fees for the first six months, or until $5 billion in assets is accumulated.
• Others, including the Bitwise Bitcoin ETF (BITB) and the Grayscale Bitcoin Trust (GBTC), have opted not to offer fee waivers.

Investors should carefully consider all fees and terms before making investment decisions and do research or talk to a professional before choosing to invest. Since these products are designed to track the performance of spot bitcoin, we recommend not solely focusing on fees to make a decision on which one to buy. If the product is low-cost but doesn’t track very tightly to the performance of bitcoin, then you are incurring a “cost” in addition to the stated fee.

Risk assessment and considerations

Investors must carefully weigh the risks associated with spot bitcoin ETFs, including regulatory uncertainties, custody arrangements, fees and price volatility. This is still an emerging asset class and will likely have big price moves day-to-day that we don’t think can be timed.

If clients express interest in having bitcoin exposure, we will generally recommend about 1% to 2% of the portfolio to start. This allows investors to acclimate to the high volatility. We emphasize that even if bitcoin were to hit zero, with a 1% to 2% portfolio allocation, it would not significantly impact their overall portfolio return in the long run. With an asset that can move in short periods of time +100%, a small allocation will still provide benefits to overall performance of the entire portfolio. A little can go a long way with this type of investment.

If clients want to have the ability to move bitcoin to a wallet, they won’t be able to do that with an ETF. Some investors prefer to be able to control the token vs having it wrapped in an ETF with other investors. Think of it this way: You can buy a gold coin and store it on your own, or you can buy an ETF with gold as its sole holding.

If at any point there are unrealized losses that an investor wants to harvest for tax reasons, they are subject to abiding to the same wash sale rules of securities. If you sell the bitcoin ETF, the way the IRS rules are written, you have to stay out of it for 30 days if you want to book the loss on this transaction. Selling one spot bitcoin ETF and buying another that invests identically is likely going to be a violation of the wash sale rule.

It is unclear at this point how custodians will monitor this on investor 1099s and how it will be enforced. If they own the token directly and harvest it, they can buy it back immediately under current tax rules, which is a notable difference vs using an ETF.

A shift in sentiment

The approval of spot bitcoin ETFs signifies a significant shift in regulatory sentiment toward digital assets. While this marks a milestone, uncertainties remain regarding future approvals and regulatory developments.

As the digital asset landscape continues to evolve, informed decision-making remains paramount for navigating the complexities of this dynamic market. If you have interest in learning more, speak to your financial adviser about your risk tolerance with an investment like this and what place bitcoin may have in your portfolio.

Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

It turns out you can – at least theoretically – thanks to a statistical measurement known as beta.

What is beta? 

 When you hear "beta" in reference to investing, think "broad" or "benchmark." Beta is a measure of how volatile an investment's price is relative to the broader market or a benchmark such as the S&P 500.

It's measured on a numerical scale where a beta of one indicates the security's price moves in line with the market benchmark. A beta of less than one indicates the security is less volatile than the market benchmark. A beta greater than one suggests it's more volatile than the market benchmark.

So, if you invest in a security with a beta of 1.0, you're getting pure market exposure. "There are no adjustments for market conditions or changes," says Mike Thompson, a chartered financial analyst and co-portfolio manager at Little Harbor Advisors. "You get exactly what the market delivers in good times and bad times."

Sometimes this is all you want. But other times, he says it can be helpful to offset some of that with tactical management.

How to use beta in investing

 You can use beta to help align your portfolio with your risk tolerance, says Tim Urbanowicz, head of research and strategy at Innovator ETFs.

If you know your stomach does somersaults anytime your portfolio's value drops, you may want to invest in more lower beta securities. This tactic will help reduce the downswings but may also mean your portfolio doesn't rise as high during up markets because beta goes both ways. 

A stock with a beta of 0.5 is half as volatile as the broader market. If the market goes down by 10%, the stock should only decline by 5%. But if the market goes up by 10%, the stock should only go up by 5%. Meanwhile, a stock with a beta of 2 will double the broader market's returns, both up and down.

You should be aware of where beta is concentrated in your portfolio, "whether it is spread across the portfolio and how the portfolio aligns," Thompson says.

Final notes on beta

The challenge with using beta in investing is that beta is a historical measure, Urbanowicz says. "Assets that were once low beta may not be low beta moving forward."

Beta is a backward-looking measure. It's "one measurement of risk based on the behavior of the market as a whole or to a benchmark's return stream, but that doesn't mean it's always going to do what's expected," Thompson says.

Beta is also only a measure of market risk. It can help you determine how a stock will react to events that impact the market as a whole. It doesn't tell you anything about the company-specific risks the stock may face, which is one reason you shouldn't rely solely on beta when making investing decisions. 

It's also important to remember that beta is a measure of volatility, and volatility is only one type of risk. Even low-beta stocks can incur large losses – they just shouldn't be as large as those experienced by the market as a whole.

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According to March data from the Internal Revenue Service (IRS), the average refund for 2024 is up moderately over 2023 numbers, to nearly $3,200.

That's a significant chunk of change – and since that figure is just an average, there will be some Americans who may be getting checks for more than that amount in the coming weeks.

For many households, tax refunds are a much-needed influx of cash to help defray necessary expenses. For others, it's a one-time windfall that may quickly be reallocated to summer vacations – or for the more aggressive folks, investments in volatile assets such as cheap stocks or cryptocurrency.

But if you're thinking about the long haul, you may want to consider investing your tax return in a structural way. Here, we take a look at how to invest your tax return doing just that.

How to invest your tax return: Fund a rainy-day account

Studies have shown that roughly half of Americans have $500 or less in emergency savings. If this sounds familiar, then your first investment should be to protect yourself.

The needs of each family are different and for some, even a few thousand dollars is just a drop in the bucket to cover their expenses. According to the Census Bureau, the median household income in the U.S. was $80,610.

Building a financial safety net is crucial if you don't currently have one. Beyond the peace of mind it provides, this low-risk investment in your savings can quickly pay for itself when you consider the high costs of overdraft fees, a poor credit score and other factors.

How to invest your tax return: Pay off high-interest debt

Another structural financial problem for many Americans is high-interest debt, with the average credit card interest rate hovering around 22% right now, according to WalletHub.

Research shows the stock market generally returns about 10% each year on average, so you'll get more than twice the bang for your buck by simply paying down debt and reducing your monthly payments.

If you're skeptical of that, then consider this math: If you have that 22% interest rate on a $2,000 purchase but can only afford to pay $50 a month on your balance, you'll ultimately end up paying more than $4,000 in full for that item.

Rather than pay double the original purchase price, you can save yourself significant interest payments by paying down the principal value as quickly as possible. Even if your total balance is larger than your return, beating back your debt as much as you can is still a wise investment.

How to invest your tax return: Open a Roth IRA

If you're more patient, investing your tax return in a Roth IRA may make more sense. You invest after-tax money in these platforms and then can withdraw it free and clear after the age of 59 ½.

That may sound like a long time, but you'll need the money come retirement – and gains over the intervening years may ultimately turn your 2024 tax return into a very big chunk of change when it comes time to cash out.

How to invest your tax return: Seek out a financial or tax adviser

Speaking of interest, here's a reality check: Receiving a big tax refund is not necessarily a good thing, since the IRS does not pay you a penny of interest. You're effectively giving Uncle Sam a free loan across the year.

If you get a particularly large return, then, it may make sense to invest that cash in a professional who can help optimize your tax status going forward and set you up for future success.

Most tax advisers are happy to work for a fee-only model, where they charge you a flat or hourly rate. Even if you don't want to pay for ongoing tax preparation every year, they can generally counsel you on how to optimize your deductions and withholding in the future to keep more of each paycheck in your pocket.

Similarly, fee-only financial advisers accept one-time charges in exchange for advice that will set you up for success. Many understand tax efficiency and can also help assess your general financial planning needs for the long term.

Use our tool below, in partnership with Bankrate, to explore and compare financial providers and services:

How to invest your tax return: Buy an index fund

It's great news if you're lucky enough to have savings, no debt and a generally sound retirement plan. That means you have the flexibility to invest your tax return and put it to work in index funds.

These products are pooled investments that are incredibly affordable, including the popular iShares Core S&P 500 ETF (IVV) that commands nearly $450 billion in assets and holds the 500 largest U.S. stocks including Microsoft (MSFT) and Apple (AAPL). The exchange-traded fund charges investors a mere 0.03% in annual expenses, which on a $3,000 tax return adds up to just 90 cents per year!

If you want to grow the money quickly, you can purchase these products in a taxable brokerage account. As you may have guessed, however, you'll have to pay taxes on the profits down the road.

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This impressive price action once again came at the hands of several mega-cap tech and communication services stocks. Among the biggest gainers were artificial intelligence (AI) chipmaker Nvidia (NVDA) and Facebook parent Meta Platforms (META) – two of the Magnificent 7 stocks – that have surged roughly 80% and 40%, respectively, so far this year. 

New S&P 500 stock SuperMicro Computer (SMCI) created its fair share of tailwinds, too, with shares of the AI infrastructure firm quadrupling since the start of the year – and gaining $41 billion in market value along the way. (Although, this is peanuts compared to the $1 trillion in market cap Nvidia added in Q1.)

Are we in a bubble?

The fast and furious rise in these stocks has led to lofty valuations across the equities market and has several folks questioning if what we're seeing is similar to the dot-com bubble from the early 2000s. There are many ways to spot a bubble, and experts see distinct differences between the two time periods. 

"As was the case in the rally leading up to the March 2000 S&P 500 high, the recent market rally has featured a relatively small number of technology-oriented stocks pushing the S&P 500 higher," says Scott Wren, senior global market strategist for Wells Fargo Investment Institute. 

Wren points to a key difference between then and now: The quality of the companies leading markets higher.

"Today, the companies driving the rally are showing strong revenue and earnings growth to go along with robust balance sheets and acceptable debt levels," the strategist says. "Back in 2000, many of the companies carried the SPX to record levels based on high hopes of one day producing strong revenues and earnings." 

That's good news for bullish investors hoping to ride the wave higher – but there's a lot at stake over the next three months that could quickly shift sentiment. 

With this in mind, we'll take a look at the Q2 investing outlook and how the key themes experts are watching could impact portfolio returns.

Earnings

First-quarter earnings season kicks off in two weeks when big banks such as JPMorgan Chase (JPM) and Bank of America (BAC) report. Q1 saw turbulence in the regional banking industry after New York Community Bank (NYCB) crashed on commercial real estate concerns.

Rodrigo Sermeño, associate editor for The Kiplinger Letter, believes declining values in office buildings will continue to pressure some banks. But large banks "should avoid the stock sell-off because they are more diversified and have set aside greater reserves to cover potential loan losses than smaller banks."  

As a group, analysts have been less pessimistic about the upcoming earnings season, says FactSet Senior Earnings Analyst John Butters. Companies, however, have been more pessimistic. This has resulted in earnings estimates that are lower today vs where they were at the start of the year, he adds.

Still, S&P 500 earnings are expected to be up 3.4% year-over-year in Q1, which would mark a third straight quarter of growth.

For investors, the fact that stock prices and valuations are high heading into earnings season "leaves little room for disappointment if companies fail to deliver strong earnings," says Clark Bellin, president and chief investment officer at Bellwether Wealth. 

However, negative earnings reactions can create opportunities for tactical investors.

"On pullbacks, we will be buying the dips of high-quality earnings names, just as we did in October 2022 and November of 2023," says Nancy Tengler, chief executive officer and chief investment officer of Laffer Tengler Investments.

Inflation and rate cuts

The first quarter reminded Wall Street that the final stretch to bring inflation down to the Fed's 2% target will be the hardest. Consumer Price Index (CPI) reports for both January and February came in higher than economists were expecting, due mostly to stubbornly high shelter inflation. 

"CPI ex-shelter has been below 2% since June – where a lack of supply has met structural demand, pushing prices ever higher," says Ross Mayfield, investment strategy analyst at Baird Private Wealth Management. However, recent data, such as Redfin's report that new listings hit a two-year high of 3.8% in February and a fourth straight monthly increase in homebuilder confidence, according to the National Association of Home Builders (NAHB), are encouraging, Mayfield notes. 

"Whatever the root cause, multiple forces are working in favor of more inventory – that's good for buyers and the Fed, alike," Mayfield adds.

Still, sticky inflation has pushed back expectations for the Fed to start lowering the federal funds rate from its current 23-year high. 

"The current expectation is that the first Fed cut will take place at the June 12 meeting," says David Payne, an economist at Kiplinger, in his interest rate outlook. Typically, the first rate cut would be followed by additional rate cuts at every other meeting. However, to avoid being "a lightning rod during the presidential campaign season," the Fed may cut on June 20, July 31 and again on November 7, immediately after the election."

If the Fed does cut rates in June, stocks could potentially see a short-term tailwind. According to Charles Schwab, since 1929, the S&P 500 has averaged a 9.9% gain in the six months following an initial rate cut. This improves to 13.4% at 12 months out.

Rate cuts could be good for the bond market too. "We have shown on multiple occasions how bonds have always rallied in the three months before the first rate cut going back to 1970, says Joseph Kalish, chief global macro strategist at Ned Davis Research.

IPOs

The first quarter saw thawing in what has been an ice-cold initial public offering (IPO) market in recent years. According to Renaissance Capital, there were 30 public offerings through March 28, up 20% year-over-year. And the $7.8 billion raised from these offerings triples what was raised in Q1 2023.

Enthusiasm around generative artificial intelligence resulted in an exciting debut for Astera Labs (ALAB), a company that makes data center connectivity chips for cloud and AI companies. This was followed by strong demand for the Reddit IPO, with both events sparking hope that more offerings will soon hit the market.

The list of upcoming IPOs looks exciting, with names such as Kim Kardashian's shapewear brand Skims and online sports retailer Fanatics among those rumored to be going public soon, prompting concerns beginner investors understand what an IPO is before getting swept up in the hype.

One potential offering that Sophie Lund Yates, lead equity analyst at Hargreaves Lansdown, is upbeat about is Databricks, a cloud-based storage and software firm. 

"The AI boom would definitely be a tailwind and should offer a structural growth opportunity," Lund Yates wrote in a note. "Databricks itself isn't ignoring the hype, having acquired generative AI company MosaicML for $1.3 billion in June. The company is hoping it can integrate this tech into its own products."

A rebounding IPO market indicates "an uptick in enthusiasm from both IPO issuers and investors, hinting at shifting market dynamics and a more welcoming landscape for public listings," writes George Chan, global IPO leader at EY.

However, investors should be cautious before buying IPO stocks. While some companies have strong first-day showings, returns over the next year tend to be weak, says the team of analysts at Trivariate Research, a market research firm based in New York. And since 2020, "the average IPO has lagged its industry average by 30% over the subsequent three years following its first closing price."

Bitcoin

Bitcoin went on a monster run in Q1, spiking nearly 70%. Helping the cryptocurrency was the late-January regulatory approval of the first spot bitcoin ETF (exchange-traded fund), which gives "investors direct exposure to the price of bitcoin without the complexities of managing bitcoin ownership directly," says Mason Mendez, investment strategy analyst at Wells Fargo Investment Institute. 

Between January 11 and March 28, assets under management (AUM) of the 11 spot bitcoin ETFs on the market reached a jaw-dropping $58 billion, according to Mendez.

More upside could be in store for the digital currency considering the upcoming bitcoin halving event, expected to occur in mid-April.

"Historically, bitcoin halvings have been associated with significant price increases in the cryptocurrency," writes Kiplinger contributor Randy Ginsburg in his feature on bitcoin halvings. "The theory behind this is simple: As the supply of new bitcoins entering the market decreases, the demand for them could surpass the supply.

Before buying bitcoin in hopes it will continue to rise, though, let's remember that the cryptocurrency market remains highly speculative and should be approached with extreme caution. For those interested in dipping their toes into the crypto space, it is crucial that they do their research and only use money they can afford to lose. 

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I often find that beginning investors want all the upside of the stock market and get upset when they see the market fall. Many times, they will pull the trigger too early and sell. They don't realize that markets will have dry spells and that some volatility is inherent in the investing process.

But how can folks avoid some of these investing mistakes? Here are some simple rules to follow when first starting your investing journey. The goal, we hope, is to help you avoid typical beginner investing mistakes.

Prepare for volatility. Unless you put all of your money into certificates of deposit (CDs) or money market funds, you can expect to see some variability in your returns. One tool to gauge how volatile a specific stock is in relation to the broader equities market is its beta. 

The S&P 500 has a beta of 1.0. So, a stock with a beta above 1 typically means it is more volatile than the broad market, while a beta below 1 signifies that the equity is less volatile.

Don't invest money that you've set aside for emergencies. Emergency funds are important and we have them for a reason. Leave enough cash to have in case of emergencies or being let go from work. Put this money in a high-yield savings account or even your checking account that you can easily access. 

Ideally, you have enough saved to cover at least three to six months of living expenses. By not putting this money in the stock market, it will not be subject to any kind of volatility or sudden price drops. Additionally, emergency funds should not be put in a CD or similar account where there are withdrawal penalties.

Don't borrow money to invest. Investment returns are not guaranteed, especially in the short term. You could end up paying more in interest and being stuck in more debt if you borrow money to buy stocks. 

Along similar lines, don't use money that should be spent on paying down current debt. Debt reduction comes ahead of investing. Once this is under control, especially with your credit cards, you can put the after-debt excess in various investment vehicles.

Build a pyramid of liquidity. For example, keep some of your excess cash in easy-to-reach vehicles such as savings, checking or money market mutual funds at a brokerage firm. This will allow you to leave your best long-term investment stocks in your portfolio and grow their returns over time.

Diversify slowly. After that, some portion, not the bulk of your excess investment assets, can be put in CDs. Don't put all this excess money into stock market funds. This will allow for a no- to low-risk way to grow your money. And rates are attractive right now, with several 1-year CD rates above 5%.

Money market accounts also give folks a safe place to store their money and get a decent rate of return. Some of the best money market accounts right now are offering yields over 5%.

Study your investing options. Still, arguably the best way to grow your money over time is in the stock market. For beginners, investing your hard-earnings cash in the stock market is best handled by first buying mutual funds, especially no-load mutual funds that don't have a commission or sales charge, and/or low-cost ETFs (exchange-traded funds). These are baskets of equities that spread the risk around, and investing in these first will allow you to develop a feel for the intricacies of the equities market.

Only after doing that for some period should you venture out and invest in individual stocks.

Stick with dividend-paying stocks. The best outcome over time for both beginning investors and long-time market participants is to buy stocks with larger market capitalizations (i.e., over $100 billion in market value) that pay regular dividends. 

An example of one of the best dividend stocks around is Coca-Cola (KO), which has a roughly $260 billion market cap and has paid out and raised its dividends annually for the past 62 years. If you don't believe us, just ask Warren Buffett, who first added KO to the Berkshire Hathaway equity portfolio back in the 80s. In his 1988 letter to Berkshire shareholders, Buffett said he expected to hold on to the stock "for a long time" and indeed he has.

Don't invest in speculative stocks. Avoid tip stocks (someone gave you a tip about a potential high-flyer) with no earnings, no dividends and a small market cap.

The best stocks to buy are those that you can live with over a long period. Don't try and make a killing with your first investing forays. The odds are arguably not going to be in your favor. This is especially true with penny stocks and/or cheap stocks trading below $5 to $10 per share with no dividends. 

Among the many reasons to avoid these low-priced stocks is the lack of liquidity, or the number of shares being bought and sold. This makes the stocks "the perfect vehicles for "pump-and-dump" schemes where stock promoters lure investors to buy shares, increasing the stock price," writes Dan Burrows, senior investing writer at Kiplinger, in his feature on why you should stay away from penny stocks. "Once the price gets high enough, the pumper sells his shares, causing the stock to fall and leaving investors with poor returns, or even losses. Anyone here see The Wolf of Wall Street?"

Also avoid stocks with earnings so low that their price-to-earnings (P/E) ratio is very high (i.e., over 30x for the coming year).

Find good investing research. There are plenty of free websites such as Kiplinger that offer sound information to help guide your investment journey. Many sites such as Yahoo Finance, Morningstar and StockCharts allow folks to research potential investing opportunities.

Doing your proper research and coming up with a plan will allow you to improve your long-term investment returns with decent results. It will also allow you to weather difficult investing periods when the market takes a downturn.

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You may not realize it, but the IRS might be celebrating, too. That's because investors can end up paying more of their gains in taxes than they have to if they aren't smart about choosing which of their shares to sell based on a factor known as cost basis.

Rather than being solely about what you make, "investing is about what you keep," explains Nilay Gandhi, a certified financial planner with Vanguard Personal Advisor. "Choosing the right cost basis method helps you keep more money in your pocket."

In concept, cost basis is simple: It's the price you paid for an investment. It isn't a worry for transactions made in tax-protected accounts, such as IRAs. Money withdrawn from those accounts is typically taxed at ordinary income rates. Whenever you sell shares held in a taxable account, however, your cost basis determines the size of your gain or loss, as well as your capital gains tax liability. The process can get tricky if you have been steadily buying shares of the same companies or funds over time.

Because prices go up and down, you paid a different price each time you made a purchase. Each separate purchase of a security in a single transaction is called a tax lot. So when it comes time to sell some of your holdings, the size of your tax-reportable gain (or loss) will depend on which lots you sell.

If you sell lots purchased more than a year ago for a profit, you could pay anywhere from no tax to 20% in federal long-term capital gains tax, depending on your tax bracket. (You might owe more to your state if it taxes capital gains.)

Selling lots you purchased within the past year for a profit could incur short-term federal capital gains tax of up to 37%, as well as possible state tax. In addition, any gain, whether short term or long term, could boost your income enough to expose you to other taxes or costs – such as the federal net investment income tax of 3.8%. Losses, on the other hand, can be used to offset gains and reduce your tax bill.

Unless you change your brokerage's default settings, whenever you sell part of a holding, most major brokerages will typically either sell the oldest lots first or report your average overall cost to the IRS. That's an okay start, but most brokerages offer other options that can reduce your taxes even more, says Allan Roth, a Colorado-based certified public accountant and financial adviser.

Choose your cost basis options wisely

Roth's preferred method is to select which lots to sell himself so that he can exactly tailor his gains or losses to that year's tax situation. To do that, you must go into your brokerage's account settings and switch the cost basis default to the fully personalized option, which goes by slightly different names at different brokerages, such as "specified lots" at Charles Schwab, "specific shares" at Fidelity and "specific identification" at Vanguard.

Before any sale, decide exactly which lots will give you the optimal combination of gains and losses, and only then direct the brokerage to sell your chosen lots.

How cost basis is calculated

For investors who don't want to spend time on such precise machinations, brokerages offer several other automatic cost basis methods that advisers say can help reduce tax liabilities. To make sure you are taking advantage of the option that's best for you, log in to your brokerage account and check (and possibly change) your cost basis default setting before you make any sale, Roth stresses.

"The IRS doesn't allow do-overs," he says. There are more than a dozen cost basis methods. Here are five of the most popular and useful options, listed alphabetically:

Average. This method, which averages all your purchase prices of the same investment, is typically reserved for mutual funds. It's the default fund option at some major brokerages, including Fidelity and Vanguard. The IRS does not allow you to use it for most stock sales. The average method is one of the simpler methods and can be a reasonable option for longtime fund investors who expect their capital gains, income and tax rates to remain stable.

First In, First Out (FIFO). This method automatically sells the oldest lots first. It is the default option for all holdings on E*Trade, Robinhood and many other brokerages, and it is the default option for stocks and exchange-traded funds at Fidelity, Schwab and Vanguard.

In a generally rising market, FIFO makes it more likely that any capital gains will be long term. Josh Trubow, a certified financial planner in Waltham, Massachusetts, notes that this option doesn't guarantee the lowest tax bill, but it can be a reasonable choice for investors wishing to donate highly appreciated stock.

It can also work for investors whose income – after the gains are added – keeps them in a low capital gains bracket. For example, for 2024, married couples filing jointly who have taxable income below $94,050 pay no federal long-term capital gains taxes. It may also make sense to take gains now if you think your tax rate will be higher in the future, Trubow adds.

Highest In, First Out (HIFO). This strategy sells the lots that you paid the most for. That can be advantageous for anyone trying to limit their capital gains and maximize their tax losses, says Vanguard's Gandhi. But, he warns, this method does not take into account the date you made the purchase. If using this method results in selling for a profit some shares bought within the past 12 months, you could face higher short-term capital gains rates.

Lowest Cost, First Out (LOFO). This method sells the investments with the biggest gains first. Like HIFO, LOFO does not take into account the date of the purchase, so it may expose users to liabilities for short-term capital gains tax. And like FIFO, it can be a reasonable option for those designating appreciated shares to donate, or for those currently in low tax brackets or who expect their tax rates to be higher in future years.

Tax-optimized. Most major brokerages offer at least one sophisticated automatic cost basis option that takes into account both timing and returns to avoid short-term capital gains taxes and maximize tax losses. E*Trade calls its version "Minimum Tax Impact," Fidelity's version is "Tax-sensitive," Schwab's is called "Tax Lot Optimizer," and Vanguard's is "Minimum Tax."

Roth, who works with clients who use a few major platforms, says he hasn't noticed significant differences in the results of the different tax-optimized methods at the brokerages. Although he still prefers designing his cost bases himself, he says the brokerages' automatic tax-minimizing options are a good compromise.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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Over the years, I have been a leading disparager. Consider just a few of the things I have written about gold in Kiplinger and elsewhere: "I am not a fan of gold" (1999). "Stay away from gold. It is a barbaric relic" (2002). "Let me put my prejudices on the table: I loathe gold" (2014). But is this time different? Let's begin with gold's biggest liability: With the exception of a single decade, it has not been a good long-term investment. 

Forget Barrick Gold (GOLD), Newmont Mining (NEM) and Agnico Eagle (AEM), the large gold-mining companies. They have been terrible performers and are unlikely to get any better. 

The most convenient way to own the metal itself is via an exchange-traded fund (ETF) such as the SPDR Gold Shares (GLD), whose value is linked to the price of bullion. Over the past 10 years, Gold Shares has returned a paltry 5.1% annualized, compared with 11.9% for the SPDR S&P 500 (SPY), the ETF linked to the popular large-stock index. 

An investment of $10,000 in the gold fund became $16,445 over that time; the same amount in large-capitalization stocks became $30,782. The gold ETF was volatile, too. It lost money in five of the past 10 calendar years and beat the S&P ETF in only three.  

The 1970s were an outlier decade for gold 

Gold's history isn't inspiring. After President Nixon ended the government's promise to convert dollars to gold at a fixed price, an ounce soared from an average of $36 in 1970 to $615 in 1980. But that amazing rise was an anomaly, driven by pent-up demand from price controls and a crazy decade of slow growth and high inflation because of poor fiscal and monetary stewardship. 

In February 1981, I wrote an article for The Atlantic about the fears of gold enthusiasts ("goldbugs," as they were called) that the newly elected president, Ronald Reagan, and his Federal Reserve chief, Paul Volcker, would set America's economic house in order, thus crushing gold. Those fears were realized, and it took 27 years for the price of gold to get back to its 1980 level. 

Gold tripled over the next five years, then stagnated and fell again. In 2016, gold seemed to anticipate the return of inflation – or maybe it just got too cheap, or investors got nervous about what the surprising new president would do. The Gold Shares ETF jumped just over a total of 50% during the Trump years, then flattened out from 2021 to 2023. 

Since 1990, gold has gone from $386 an ounce to that recent record of $2,147. Sound good? That's an increase of a factor of a little less than six. Over the same period, the Dow Jones Industrial Average rose by a factor of 14. Gold increased at less than 5% annually; stocks, 8%. Obviously, such calculations depend on where you start, but any post-1980 analysis has gold rising at a far lower rate than stocks. 

Here's the kicker: Gold doesn't pay dividends. Stocks do – and I am not even counting their dividends in the analysis above. In fact, if you hold physical gold, you have to pay a fee for the storage. 

Fundamentals favor stocks over gold by a mile

As a commodity with no significant industrial use, gold increases mainly with the cheapening of the dollars used to purchase it (that is, the effect of inflation), plus the emotions – mostly fear – of the buyers. 

Gold also benefits from the rising wealth of the world, which drives the demand for jewelry, but that demand is counterbalanced with increasing supply through better mining. Production has risen 50% since 1997, which is one reason Barrick Gold's stock is cheaper today than it was then. 

Stocks, by contrast, increase because the value of the underlying companies is determined by the imagination and diligence of the humans who manage and work for them. When you buy stocks, you buy brains and hard work. You get to ride along on the dream train with the inventors of a phone that can tell you everything about the world and lets you video chat with relatives 10,000 miles away, the engineers who figured out how to drill for oil sideways, the scientists who developed treatments to put cancer into remission and medicine to make you thin, the builders of cruise ships that carry 8,000 passengers, the fashion designers who make yoga wear, and the streaming-media providers who make it possible to watch a TV series whenever and wherever you please. 

Gold certainly has a mystique as a haven. But in times of catastrophe, gold's record is mixed. Yes, during the financial crisis of 2008, gold rose 5% as stocks dropped 38%. And when COVID struck in early 2020, the S&P 500 index fell 34% in just over five weeks while gold held nearly all its value. But after the attacks of 9/11, for example, gold and stocks performed about the same. Plus, when it comes to safe havens, U.S. Treasury bonds have typically been a better bet. 

Isn't gold a hedge against inflation?  

The rate of growth in the Consumer Price Index zoomed from 1.2% in November 2020 to a peak of 9.1% in 2022 – one of the steepest increases in U.S. history. During that time, stock prices rose, then fell, and wound up being flat overall. Gold was flat, too. In fact, gold didn't take off until the inflation rate peaked and started falling. 

The reason that gold isn't an unmitigated delight during inflationary times is that when consumer prices rise, interest rates go up as well. Gold typically suffers when interest rates are high because it doesn't pay interest or dividends, so its relative position declines against bonds yielding 5% and stocks yielding 2%. 

Who should buy gold?

And stocks, of course, rise briskly over time—not every month or every year, but almost always over a decade and more. Gold does not. The case for gold, in my view, is short term only, and it goes something like this: Currently, investors have become relaxed about inflation, with the Fed signaling that cuts in interest rates may be on the way. Having been far too pessimistic, Mr. Market may have gone overboard in the other direction.

Meanwhile, look at the world. The war in Ukraine could easily spread to other parts of Europe. The war in Gaza could ignite a conflagration not just with Hezbollah but with Iran itself. And what about North Korea? Taiwan? Some even say that democracy in the U.S. itself is in jeopardy and that the debt of the richest nation in the world is getting shaky. 

I'm not an alarmist, and I am aware of gold's spotty record in crises. But, for all its deficiencies, gold remains the best prospective hedge against disaster. I am definitely not buying gold as an insurance policy, but, for investors with apocalyptic views, there is probably nothing better.

James K. Glassman chairs Glassman Advisory, a public-affairs consulting firm. He does not write about his clients. His most recent book is Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence. You can reach him at JKGlassman@gmail.com.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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A brokerage sweep account, sometimes called a core or settlement account, holds your uninvested cash. When you sell a security – a stock, mutual fund or exchange-traded fund, say – the proceeds are placed in the sweep account. And when you buy a security, cash in the account pays for the trade. It all happens automatically. 

But here's the rub: Some brokerage firms park your cash in accounts with good yields, while others put it in holding places with not-so-good yields. 

At Fidelity, for instance, cash in retail brokerage and retirement accounts sits in a money market mutual fund that yields a healthy 5.0%. Vanguard's default settlement account, a government money market fund, yields 5.3%. By contrast, Charles Schwab offers a choice of two sweep accounts. Both yield 0.45%. And E*Trade offers little choice – most customers land in a bank deposit program that currently yields 0.01% for balances of $499,999 or less. (All yields and data are through November 30, unless otherwise noted.)

Of course, sweep accounts are supposed to be temporary holding places, not cash management accounts. You can't write checks or pay bills from a sweep account, for example. "It's a settlement account, for the liquid cash you have at your brokerage," says Greg McBride, Bankrate.com's chief financial analyst. 

If your brokerage firm offers a government money market fund as its default sweep account, you probably don't need to worry about your settlement account yield or make a change. But if your brokerage account cash isn't earning 4% or better, it may pay to consider alternatives. 

Finding the right place for your idle cash isn't just about getting the best yield, however, says Peter Crane, president of money-fund-tracker Crane Data. Other factors matter too, such as how soon you plan to use your cash and how much of it you have. Keep these tips in mind before you move your money out of a sweep account. 

Know your options when it comes to sweep accounts 

Some firms let you choose a different default sweep account – a bank account, say, or a government-debt or muni-bond money market mutual fund. If your firm doesn't (and you don't like its default option), you'll have to move cash on your own to a competitive money market fund. 

Schwab guides investors who want to boost their cash yield to money market funds, including money funds that hold government debt or municipal bonds. The taxable money fund yields range from 5.06% to 5.25%, and they have no transaction fees or investment minimums. But you don't get instant access – the money will be available in your sweep account the next day if you sell shares in the money fund by 4 pm Eastern time.

Vanguard offers as a second option a bank sweep account called Vanguard Cash Deposit, which yields 3.7% as of August 31. But Jeffrey DeMaso, editor of The Independent Vanguard Adviser, a newsletter about Vanguard funds, favors the default government money fund over the cash deposit account, in part because the money fund offers a higher yield. 

Make sure your money is accessible 

Where you hold your money matters, depending on how you plan to use it. "Convenience is the most important factor," says Crane. Funds you want to put to work immediately in the event the stock market takes a dip are best held at the ready in your brokerage account, even if that's in a low-yielding sweep account. Otherwise, "you could miss a buying opportunity of a lifetime," says Crane. 

The caveat is how much money you're sitting on and how long you plan to hold it. If it's $100,000, $20,000 or even $10,000, a 5.0% yield over one year can be meaningful ($500 to $5,000). Unless you're planning to invest the whole pot in short order, it may be worthwhile to shift some of the cash to a higher-yielding money fund. 

Don't overthink money market funds  

The vast majority of money market funds invest in short-term government debt, says Crane, and "it really doesn't matter which one you pick." The two biggest are the Fidelity Government Money Market Fund (symbol SPAXX, expense ratio 0.42%, seven-day yield 5.0%) and the Vanguard Federal Money Market Fund (VMFXX, 0.11%, 5.3%). 

There's no minimum on the Fidelity fund. But the Vanguard fund requires a $3,000 initial investment – unless you're a Vanguard brokerage account customer, in which case there's no minimum. Just remember that if you invest in a money market fund outside of your sweep account, transfers may not be instantaneous. 

Don't obsess about yields in the same ballpark 

People tend to dither over choosing a fund with a 5.25% yield or one at 5.00%, says Crane. That's annualized. You'd have to leave the cash for 12 months to earn the full yield, and even if you do, the difference in earnings may not amount to much. Over the course of a year, for instance, you'd earn $1,050 on a $20,000 balance at 5.25% and $1,000 at 5.00%. 

That said, money market funds with yields that seem too high are a red flag. The Federal Reserve has set its short-term interest rate target between 5.25% and 5.50%. If a money market fund yields 6%, says Crane, "You have to ask yourself why. The fund may be taking on some added risk." 

All yields are net of fees and are annualized. Money market funds quote seven-day yields, and bank-issued money market deposit accounts and savings accounts cite annual percentage yield (APY), which includes the effect of compounding interest. They're calculated differently, so these yields "aren't necessarily apples to apples, but they're comparable," says Bankrate's McBride. "They're both projections on how much you'll earn over the course of the coming year." 

Skip municipal-bond-based money market funds 

Municipal debt generates income that is exempt from federal, and sometimes state, income taxes. But unless you're in the highest tax bracket, or you live in a high-tax state such as California or New York, "ignore them," says Crane. 

For starters, the yields on municipal-bond money funds tend to bounce around a lot. And the tax-equivalent yields on these funds aren't as enticing unless you're a very high earner. For instance, the 3.38% yield on the Vanguard Municipal Money Market Fund (VMSXX), the biggest retail fund, translates to a tax-equivalent yield of 4.44% for investors in the 24% federal tax bracket. But the tax-equivalent yield for those in the 35% bracket, including the extra 3.8% Medicare surtax on investment income that applies to certain high income earners, jumps to 5.52%. 

Consider Treasury bills for cash you won't invest right away  

These U.S. Treasury IOUs have maturities of less than one year (they're issued in four-week, eight-week, 13-week, 17-week, 26-week and 52-week maturities). Recently, one- to three-month bills yielded nearly 5.5% or more; four-month and six-month bills, roughly 5.4%. 

"This flexibility allows investors to potentially earn a higher return on their savings and still have access to their funds when needed," says Jonathan Bird, a certified financial planner in Phoenix, Arizona. 

You can buy them through your broker, typically for a minimum of $1,000. Or consider a T-bill exchange-traded fund, such as the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL, 0.14%, 5.3%) or the iShares 0-3 Month Treasury Bond ETF (SGOV, 0.07%, 5.2%).

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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