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ETF US Market

Best ETFs To Buy For Passive Investors $VT $VOO $QQQ

Calvin Lo

Everyone invests for different reasons. If you’re looking for a way to grow your wealth without having to actively monitor the stock markets or manage your portfolio daily, you might find these Exchange-Traded Funds (ETF) interesting options to park your money. One caveat though is that passive investing is only suitable for long-term goals.

Not everyone has the time or interest to get extensively involved in managing their investment portfolios. Many might just leave it to financial advisors and review annually. However, now that we have ETFs (specifically index ETFs), we have the realistic option of investing passively on our own without having to actively monitor the markets and manage our portfolios daily. The trade-off is that you may have to accept average market returns, which judging from the last 3 years is actually not too shabby.

If you’re not familiar with ETFs, they are simply funds pooled by a fund manager to invest into a certain benchmark index or specific themes according to the fund’s mandate. The great thing about ETFs is that they are listed on stock exchanges and can be bought directly by retail investors through retail stock brokers.

The ETFs I’ll be presenting today are known as index ETFs, which are set up to track a certain index or benchmark created by index providers, separate from the fund managers themselves. The reason I’m looking only at index ETFs is because they are inherently passive by nature since they are tracking indexes.

Most indexes work by weighting their constituents according to the market capitalisation of companies in the chosen geographical region or sector. In simplistic terms, the bigger the company by value, the bigger their weightage will be in the index.

This makes it easy to formulate the constituents and weightings since there’s a set mathematical formula, which I like as an engineer. So the process is considered passive, because the index provider just has to use the formula, and the fund manager just has to follow suit and execute.

If you want to find out more about ETFs, Investopedia is a great resource, linked here.

Note on index providers and fund managers

Before we go into the actual ETFs, I would like to point out that for any given country or sector index there are usually several index providers that have created similar indexes with only slight differences. The 3 main index providers are FTSE Russell, MSCI, and S&P indices.

Fund managers use these indexes to create the products to be consumed by retail and institutional investors. In this case, we’re looking specifically at ETFs but fund managers can also create other products like mutual funds that also track the same indexes. There are many more fund managers but the 5 main ones focused on ETFs are BlackRock (iShares series), Vanguard, State Street (SPDR series), Invesco, and Charles Schwab.

Another note is that although I tend to favour Vanguard for their lower fees, other fund managers listed above have similar ETFs and also very competitive fees / expense ratios so don’t get too hung up on the different fund managers.

Ok I hope I didn’t confuse you. Without going into too much further detail and risk causing more confusion, here are the best ETFs to buy for passive investors, in my humble opinion:

1. Vanguard Total World Stock ETF (VT)

VT essentially owns the world. VT invests in both US and foreign stocks, and tracks the FTSE Global All Cap Index. Every region is included, although still heavily weighted to North America at 62% due to the size of the US stock market.

VT is extremely diversified with 9000+ stocks and the top 10 stocks only making up 15% of the fund. Currently the only non-US company in the top 10 is TSMC (dual listed in Taiwan and NYSE). The advantage of holding VT is that should other non-US companies outperform US companies, they will likely be included into the ETF as the constituents are reviewed.

See also my previous post on why I think VT could be the best core investment for your portfolio here.

An alternative to VT with similar exposure is the iShares MSCI ACWI ETF (ACWI).

Source: Vanguard

2. Vanguard S&P 500 ETF (VOO)

If you’re looking for pure US exposure, VOO could be good option. According to Statista, the US stock market is still the largest in the world by far representing 56% of total world equity market value.

Source: Statista

VOO tracks the S&P 500 index which is probably the most well known and closely followed index in the world, and represents the 500 largest companies listed in stock exchanges in the US.

VOO is also very diversified with 500+ stocks in all sectors and the top 10 stocks only make up 30% of the fund. The heaviest sector weight is in Technology naturally because the top 10 is currently dominated by Big Tech companies.

Other than different weightings and the exclusion of TSMC which is a non-US company, there isn’t much difference in constituents with VT. The risk with holding just VOO is if the US underperforms other major economies.

Alternatives to VOO include SPDR S&P 500 ETF (SPY) and iShares Core S&P 500 ETF (IVV).

Source: Vanguard

3. Invesco QQQ Trust (QQQ)

If you’re looking into heavier (but not pure play) exposure into the US Tech sector, QQQ might be a good option. QQQ tracks the Nasdaq-100 index, which represents the 100 largest non-financial companies by market cap listed on the Nasdaq stock exchange.

QQQ is the least diversified of the ETFs so far, with only ~100 holdings, 51% in Tech, and the top 10 making up ~52% of the fund.

QQQ also only holds stocks listed on the Nasdaq, so stocks listed on other US stock exchanges like NYSE are excluded. For now, that’s not an issue since the largest US companies are Tech companies. However, the risk is if companies listed on NYSE or financial companies outperform significantly, QQQ might end up underperforming.

An alternative to QQQ could be the Technology Select Sector SPDR Fund (XLK) but it is more narrowly focused on companies categorised strictly under Tech and excludes big companies like Amazon and Tesla (both Consumer Discretionary), and Meta/Facebook (Communication).

Source: Invesco

Final thoughts

The ETF universe is vast and there are many types of ETFs springing up now. Investors are spoilt for choice, and deciding which ETF to invest in can get pretty overwhelming.

These index ETFs I’ve presented are amongst the largest, most diversified, and most liquid ones. I hope this sharing helps you if you’re considering a more passive investing approach. I think even seasoned investors can benefit from having one or two of these ETFs as part of their portfolio.

Personally, I hold VT and QQQ as core holdings in my portfolio. Over the years, I’ve added other ETFs and individual stocks to try to outperform the market but so far that hasn’t really worked out. If you’re interested, head over to my Portfolio page.

I’m increasingly seeing the value of index investing and the passive investing approach, at least for the bulk of my long-term portfolio. Besides steadier and more predictable returns, there are other intangible benefits like greater peace of mind and more time to spend on other things we value, e.g. family, friends, hobbies, passions, etc. The intangible benefits alone I think are reason enough to at least consider this approach.

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Disclosure: I’m long VT and QQQ

Disclaimer: This is not financial advice. I am not professional financial advisor nor do I work in the finance industry. Anything I write here is purely my personal opinion. Please do your own research and due diligence before investing into anything. All investments come with associated risks. Best to consult a financial advisor if you’re still unsure.

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