Best ETFs: 21 Top-Performing Exchange Traded Funds for May 2024 - NerdWallet (2024)

Diversification is hard work. A well-rounded investor may own stock in dozens or even hundreds of publicly-traded companies — and stock research on all of those companies can take a lot of time.

One workaround is to invest in exchange-traded funds (ETFs). These are baskets of companies that trade on exchanges like the New York Stock Exchange and the Nasdaq, just like stocks, and can provide exposure to many stocks with a single purchase.

The best ETF for you will depend on your particular goals. More risk-averse investors with shorter investing timelines may gravitate toward conservative ETFs that focus on preserving capital, while more risk-tolerant investors with longer timelines may gravitate to equity ETFs with greater potential returns (but also greater potential volatility).

Below is a list of the best ETFs with expense ratios below 0.5% that hold large U.S.-based companies, in terms of five-year performance. Leveraged ETFs, inverse ETFs and hedged ETFs are excluded.

Source: VettaFi. Data is current as of May 1, 2024, and is for informational purposes only.

Below is a table of the best-performing ex-U.S. ETFs in VettaFi's database that have at least $5 billion in assets under management, ranked by one-year return. These ETFs contain international stocks.

Source: Finviz. Data is current as of May 20, 2024, and is for informational purposes only.

This table shows the best-performing growth stock ETFs listed by VettaFi that have at least $50 billion in assets under management. They are ordered by one-year returns.

Source: Finviz. Data is current as of May 20, 2024, and is for informational purposes only.

We've also screened VettaFi's ETF database to find the best-performing value ETFs with at least $20 billion under management. They are ranked below by one-year returns. Value ETFs seek to invest in undervalued stocks.

Source: Finviz. Data is current as of May 20, 2024, and is for informational purposes only.

ETF pros

Investors have flocked to exchange traded funds because of their simplicity, relative cheapness and access to a diversified product. Here are the pros:

Diversification

While it’s easy to think of diversification in the sense of the broad market verticals — stocks, bonds or a particular commodity, for example — ETFs also let investors diversify across horizontals, like industries. It would take a lot of money and effort to buy all the components of a particular basket, but with the click of a button, an ETF delivers those benefits to your portfolio. Diversification can help safeguard your portfolio against market volatility. If you invested in just one industry, and that industry had a really bad year, it's likely your portfolio would have performed poorly too. By investing across different industries, company sizes, geographies and more, you give your portfolio more balance. Because ETFs are already well-diversified, you don't have to worry about creating diversification within your portfolio.

Transparency

Anyone with internet access can search the price activity for a particular ETF on an exchange. In addition, a fund’s holdings are disclosed each day to the public, whereas that happens monthly or quarterly with mutual funds. This transparency allows you to keep a close eye on what you're invested in. Say you really don't want to be invested in oil — you'd be able to spot those additions to your ETF more easily than with a mutual fund.

Tax benefits

ETFs have two major tax advantages over mutual funds.

If you invest in a mutual fund, you may have to pay capital gains taxes (or, the profits from the sale of an asset, like a stock) through the lifetime of your investment. This is because mutual funds, particularly those that are actively managed, often trade assets more frequently than ETFs. Most ETFs, on the other hand, only incur capital gains taxes when you go to sell the investment. This means you'll pay less tax on your ETF investment overall.

As mutual fund managers are actively buying and selling investments, and incurring capital gains taxes along the way, the investor may be exposed to both long-term and short-term capital gains tax. If you're invested in an ETF, you get to decide when to sell, making it easier to avoid those higher short-term capital gains tax rates.

ETF cons

Exchange traded funds may work well for some investors, but they aren't perfect. Here are the cons:

Trading costs

ETF costs may not end with the expense ratio. Because ETFs are exchange-traded, they may be subject to commission fees from online brokers. Many brokers have decided to drop their ETF commissions to zero, but not all have.

Potential liquidity issues

As with any security, you’ll be at the whim of the current market prices when it comes time to sell, but ETFs that aren’t traded as frequently can be harder to unload.

Risk the ETF will close

The primary reason this happens is that a fund hasn’t brought in enough assets to cover administrative costs. The biggest inconvenience of a shuttered ETF is that investors must sell sooner than they may have intended — and possibly at a loss. There’s also the annoyance of having to reinvest that money and the potential for an unexpected tax burden.

Neither the author nor editor held positions in the aforementioned investments at the time of publication.