Best performing ETFs which consistently outperform the S&P500 over the past decade

If you are just beginning your investment journey, it can be wise to lay a strong foundation for your portfolio by investing in exchange-traded funds (ETFs). In this article, we will be exploring 10 of the best performing ETFs which have consistently outperformed the S&P500 index over the past decade.

What are ETFs?

ETF is a type of security that involves a collection of securities, such as stocks that often tracks an underlying index although they can invest in any number of industry sectors or use various strategies.

They are similar to mutual funds, a key difference being that they are listed on exchanges, and ETF shares trade throughout the day just like an ordinary stock.

One of the key advantages of ETF is its ability to allow an investor to partake passively in a broad basket of stocks, hence a popular choice for diversification.

There are different types of ETFs which could include Bonds ETFs, indexed-stock ETFs, Industry-specific Stock ETFs, Commodity ETFs, Currency ETFs, and Inverse ETFs, etc.

Some of the Pros and Cons of investing in ETFs are listed below:

Pros

• Access to many stocks across various industries
• Low expense ratios unlike unit trusts
• Risk management through diversification
• Available to access to thematic ETFs

Cons

• Some ETFs might have high expense ratios
• Single industry focus ETFs limit diversification
• Lack of liquidity might hinder transactions

All in all, ETFs remain a particularly useful asset class for a new investor to start his/her investing journey without the hassle of selecting individual stocks which will expose them to unsystematic risk. This is a risk that is inherent in a specific company. By investing in a range of companies, unsystematic risk can be drastically reduced through diversification.

The table below shows the 25 largest ETFs in the world by net assets.

New investors who wish to participate in the largest and most liquid ETFs in the world can consider these ETFs. These ETFs are also ideal for engaging in options given their liquidity status.

In the table, I have also listed the underperformance or outperformance of the ETFs, benchmarked against the S&P500 index.

Most of these large-cap ETFs have significantly underperformed the S&P500 index. Only 3 of the largest ETFs in the world (with NAV >$40bn) have outperformed the S&P500 index over a 10 years horizon. The 3 are Vanguard Growth Index Fund ETF Shares (VUG), Invesco QQQ Trust (QQQ) and iShares Russell 1000 Growth ETF (IWF)

In this article, we will however be focusing on the “best-in-class” ETFs, those with NAV over $10bn, and consistently outperform the S&P500 index over 1 year, 2 years, 5 years and 10 years.

Best Performing ETFs of the decade   

The table provides a summary of the best performing ETFs of the decade. This list is screened not solely on excess total returns over the past 10 years but one where the ETFs consistently outperform the S&P500 over the monitored horizons (YTD, 1 year, 2 years, 5 years and 10 years)

Starting with the lowest outperformance to the largest:

Schwab US Large-Cap ETF (SCHX) – 10-year outperformance (1.1%)

SCHX Factset Analytics Insights

SCHX is a low-cost, highly liquid ETF that provides solid if somewhat overly broad exposure to the large-cap space. Compared with our segment benchmark, it reaches further down the cap spectrum, with a large allocation to midcaps.

Despite holding hundreds of more securities than our neutral benchmark, SCHX’s sector allocations match the market well. It provides a solid overall exposure to the large-cap space, so long as one considers any potential overlaps with existing midcap exposure. With extremely low holding costs and excellent liquidity, SCHX is a great choice for investors who like the idea of a broader large-cap universe.

Top 10 holdings of the fund

Vanguard Large-Cap Index Fund ETF Shares (VV) – 10-year outperformance (3.8%)

VV Factset Analytics Insights

VV provides cheap and liquid exposure to a generously-defined portfolio of US large-cap stocks. It holds an additional 300+ securities beyond our large-cap benchmark’s universe, pushing into the midcap space as we define it. These added names boost the overall diversification to its portfolio, and at times very slightly shade performance towards midcaps. The key for most investors is ensuring that VV’s expansive definition of large-caps doesn’t overlap with existing midcap funds they may hold.

The fund switched from a similarly broad MSCI index to its current CRSP index in January 2013. Despite a midcap overweight, VV provides very good large-cap exposure. Vanguard discloses holdings monthly on a lagged basis, not daily as most ETF issuers do. Otherwise, VV is a great fund, with huge assets, a long track record, tiny holding costs, and strong liquidity at any size.

Top 10 holdings of the fund

iShares Russell Mid-Cap Growth ETF (IWP) – 10-year outperformance (31.4%)

IWP Factset Analytics Insights

IWP is a solid representation of mid-cap growth despite some small quirks. By selecting from the 800-smallest Russell 1,000 companies, the fund ends up going quite a bit outside of what we consider proper boundaries for mid-cap stocks. While other funds in the segment tend to tilt toward smaller companies, IWP leans largely.

Investors should ensure that the fund doesn’t overlap too much with their large-cap positions. IWP’s comprehensive portfolio exhibits mild sector tilts compared to our neutral benchmark. The fund uses forecast earnings growth and historical sales/share growth to select stocks.

The IWP’s fee is mid-range among its peers but combined with its strong liquidity and tight index tracking it makes for a very competitive overall cost package. Investors have taken notice: IWP is one of the most popular funds in the segment and has attracted billions in AUM. Overall, the fund delivers a viable and liquid growth portfolio with a large-cap bias.

Top 10 holdings of the fund

iShares S&P500 Growth ETF (IVW) – 10-year outperformance (97%)

IVW Factset Analytics Insights

IVW is one of the most established and popular growth-focused ETFs, holding firms with growth characteristics from the S&P 500 Index. S&P’s style methodology selects companies based on three growth factors: sales growth, earnings growth, and momentum.

IVW was one of the first growth-focused ETFs to launch. The portfolio shows only modest sector tilts compared to our large-cap-growth benchmark, with a small but persistent bias toward midcaps. VOOG and SPYG track the same index with similarly low holdings cost. Overall, the fund is inexpensive and provides balanced exposure to large-cap-growth firms.

Top 10 holdings of the fund

Vanguard Growth Index Fund (VUG) – 10-year outperformance (112%)

VUG Factset Analytics Insights

VUG is passively managed to provide broad exposure to US large-cap growth firms. VUG’s CRSP index (which it switched to in 2013) selects stocks based on six growth factors: expected long-term growth in earnings per share (EPS), expected short-term growth in EPS, 3-year historical growth in EPS, 3-year historical growth in sales per share, current investment-to-assets ratio, and return on assets.

The fund holds many of the same names as our benchmark in its top holdings, yet is less concentrated because it dips into the midcap space. Be careful that the fund doesn’t overlap with other midcaps in your portfolio. The fund does lose a few points for transparency: as with all its funds, Vanguard discloses holdings monthly, rather than daily. Overall, VUG is an excellent choice for investors seeking diversified exposure to space.

Top 10 holdings of the fund

Schwab US Large-Cap Growth ETF (SCHG) – 10-year outperformance (122%)

SCHG Factset Analytics Insights

SCHG is one of the most diverse large-cap growth ETFs available. It selects growth stocks from the 750 largest companies (by capitalization) based on six fundamental factors which include projected earnings growth as well as trailing revenue and earnings growth. Because it’s drawing from a far larger selection universe than our benchmark, SCHG has a significant mid-cap tilt.

Nevertheless, it provides similar exposure across a broader set of holdings. An eminently Tradable fund, SCHG has high on-screen liquidity, narrow-spreads, and easily-traded underlying assets. It’s also extraordinarily cheap-to-hold thanks to rock-bottom expenses and near-perfect tracking. It remains an excellent choice for investors looking for long-term growth exposure to the largest US companies.

Top 10 holdings of the fund

iShares Russell 1000 growth ETF (IWF) – 10-year outperformance (123%)

IWF Factset Analytics Insights

IWF is one of the most popular US large-cap growth ETFs with a long track record. IWF holds stocks selected from the popular Russell 1000 Index, based higher I/B/E/S forecasts for medium-term growth and higher sales per share historical growth as compared to others in the index. Like our benchmark, the fund’s top holdings are mostly packed with tech giants.

While IWF is considered a large-cap fund, a sizable portion of the portfolio is allocated to midcaps due to its expansive Russell 1000 parent. Vanguard’s VONG tracks the same index.

Top 10 holdings of the fund

Consumer Discretionary Select Sector SPDR Fund (XLY) – 10-year outperformance (158%)

XLY Factset Analytics Insights

XLY delivers a cheap, liquid portfolio of large-cap consumer-discretionary stocks. The fund’s expense ratio ranks among the lowest in the segment while its AUM and daily trading volume tower over its competitors. XLY’s basket of stocks represents the sector well, despite concentration in the largest names. The fund pulls its holdings from the S&P 500, which differs from the broad-market universe used by competing funds in that it excludes small-caps and most midcaps.

The resulting basket contains just a fraction of the names held by our more diverse benchmark; however, industry biases are small and XLY’s performance has been marketlike. The fund’s average market cap is higher than our benchmark’s, but overall XLY represents the space well at low all-in cost. The fund earns a spot on our Analyst Picklist for solid exposure at a very low total cost.

Top 10 holdings of the fund

Technology Select Sector SPDR Fund (XLK) – 10-year outperformance (248%)

XLK Factset Analytics Insights

XLK was the first to launch in this space, as such it offers a narrower focus on the US technology segment. Its S&P 500-only portfolio tilts away from our segment benchmark. XLK is heavily concentrated and also a few that seem like misfits, such as financial payment processors or telecom firms. Its limited selection universe excludes small-caps and most midcaps.

Avoiding smaller, less-stable firms results in lower volatility and a tilt toward value compared to our broad tech-industry benchmark index and can cause other minor performance differences. XLK held the title for a long time as the cheapest and the largest fund in its segment.

Top 10 holdings of the fund

Vanguard Information technology index Fund ETF (VGT) – 10-year outperformance (289%)

VGT Factset Analytics Insights

VGT is one of the most diverse market-cap-weighted technology ETFs available, yet it still reflects the concentrated nature of the space. It represents the market well, including more small- and micro-caps than most of the other broad tech sector funds while still managing to keep all-in costs extremely low.

Definitions of “tech” differ from fund to fund: VGT includes credit card firms but excludes telecoms. Gaming and internet services companies were moved to sibling VOX following a GICS revision in 2018. (Note that Fidelity’s FTEC tracks a nearly identical index). VGT reliably delivers the returns of its underlying index. For investors who want broad, plain-vanilla exposure to the US technology market at low cost, VGT gets it done. From May 3 to December 3, 2018, VGT tracked a transitional version of its index that incrementally removed exposure to reclassified companies.

Top 10 holdings of the fund

Invesco QQQ Trust (QQQ) – 10-year outperformance (292%)

QQQ Factset Analytics Insights

QQQ is one of the best established and typically one of the most actively traded ETFs in the world. Often referred to as “the triple Q’s”, it’s also one of the most unusual. The product is one of a few ETFs structured as a unit investment trust. Per the rules of its index, the fund only invests in nonfinancial stocks listed on NASDAQ, and effectively ignores other sectors too, causing it to skew massively away from a broad-based large-cap portfolio. QQQ has huge tech exposure, but it is not a ‘tech fund’ in the pure sense either.

The fund’s arcane weighting rules further distance it from anything close to plain vanilla large-cap or pure-play tech coverage. The ETF is much more concentrated in its top holdings and is more volatile than our vanilla large-cap benchmark. Still, the fund has huge name recognition for the underlying index, the NASDAQ-100. In all, QQQ delivers a quirky but wildly popular mash-up of tech, growth, and large-cap exposure. The fund and index are rebalanced quarterly and reconstituted annually.

Top 10 holdings of the fund

Conclusion

The above list shows the best-performing ETFs that have consistently outperform the S&P 500 index, which in itself has been one of the best performing indices in the world.

As seen, the best performing ETFs, their top holdings are very much technologically-skewed with a big weighting on large-cap tech stocks. Only IWP and XLY have holdings that are not large-cap tech-dependent.

There is no guarantee that these top-performing ETFs will remain consistent in their performance over the next decade. Nonetheless, they are good consideration candidates for investors looking to invest in large-cap liquid ETFs that have a good track record of outperformance.

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Disclosure: The accuracy of the material found in this article cannot be guaranteed. Past performance is not an assurance of future results. This article is not to be construed as a recommendation to Buy or Sell any shares or derivative products and is solely for reference only.