3 ETFs the Smartest Investors Are Buying

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Part stock-like, part-mutual-fund-like, exchange-traded funds have been exploding in popularity over the past two decades. The Investment Company Institute estimates that, as of the end of 2014, there were 1,411 index-based and actively managed ETFs based in the United States. It's not surprising, then, that many people can get confused, wondering which ETFs they should consider for their portfolios. Today, we offer three ETFs that smart investors are buying.

Selena Maranjian: When I was a less smart investor, I would easily get my head turned by some fund that had a spectacular year, sometimes investing in it only to get burned -- because spectacular years are often outliers. I'd also get excited about some latest thing, such as nanotechnology, not appreciating that many of these latest things can take decades to grow in earnest. Now that I'm a smarter investor, I have more respect and appreciation for simpler investments, such as inexpensive, broad-market index funds -- mainly because they're easy and tend to outperform actively managed funds.

A broad-market index-based ETF can invest you in the whole world's markets. Photo: David Goehring, Flickr.

A solid ETF in that category is the Vanguard Total World Stock ETF . Whereas an index fund based on the S&P 500 will expose you to about 80% of the U.S. stock market's value, and the Vanguard Total Stock Market ETF, another worthwhile contender, will track the entire U.S. stock market, the Total World Stock gives you even more -- most of the whole world's market!

The U.S. does have a massive, powerful, and growing economy, and you can do well just investing domestically, but it's smart to add some foreign holdings to your portfolio, too, for diversification and to capture the rapid ascent of emerging markets. The Vanguard Total World Stock ETF offers stocks from Europe (recently 22% of total assets), the Pacific (14%), and beyond, including emerging markets (9%). It gives you much of the American market as well, with North America representing 55% of assets. Indeed, as of June 30, nine of the top 10 holdings were U.S-based.

Its expense ratio (the annual fee) is a paltry 0.17%, and it offers a respectable 2.3% dividend yield. If you're a long-term investor who can handle a little volatility and who would like a simple way to invest in the world at rock-bottom rates while earning dividend income, check out this ETF.

Jason Hall: There's a lot of evidence that the best way to maximize your returns with ETFs and mutual funds is to avoid actively managed ones and keep fees as low as possible.

This approach has made index funds that follow a major benchmark such as the S&P 500 very popular.Of course, if you're trying to outperform the market, you'll never do that if you just invest in a fund that tracks the benchmark you want to beat.

Then why not invest in a fund that follows a benchmark that has historically outperformed the S&P 500? One worth taking a closer look at is the Vanguard Growth ETF , which tracks the CRSP US Large Cap Growth Index. This ETF has handily outperformed both the S&P 500 and the Vanguard S&P 500 Admiral Shares that have tracked it since 2004, when the Growth ETF was created:

Why is that the case? In short, the S&P 500 consists of America's 500 largest publicly traded companies, plenty of which have limited (or no) real growth prospects. The CRSP U.S. Large Cap Growth Index, on the other hand, is specifically made up of large companies that meet certain growth criteria.

With an expense ratio of 0.09%, the Vanguard Growth ETF is a great way to invest in a low-cost, passive fund that has historically outperformed the S&P 500.

Dan Caplinger: One unusual favorite among savvy ETF investors in recent years has been the VelocityShares Daily Inverse VIX Short-Term ETN . Even its name is a mouthful, but this ETN (short for exchange-traded note) is designed to have its shares rise in value when volatility levels in the market decline. Given the relatively favorable bull market environment we've had for years now, the inverse-volatility ETN has produced huge returns in its short existence, with average annual gains of more than 55% over the past three years.

The reason this ETN has been so effective is that investors have expected volatility to rise but have been thwarted in that expectation. Because the inverse-volatility ETN uses futures contracts to gain exposure to the volatility market, it has profited from certain conditions in the futures markets that have essentially given the fund an incremental bump in its return every month.

Going forward, some analysts believe that the inverse-volatility ETN has already seen its biggest gains, because traders have discounted the potential for a market reversal and therefore are putting an end to the conditions that support its price for so long. Moreover, this investment is quite risky, as it can lose major portions of its value over the span of just a few days when markets hit turbulence. Still, the inverse-volatility ETN has had years of success, rewarding those who calmly assessed the potential for major downward moves in the market.

The article 3 ETFs the Smartest Investors Are Buying originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. Jason Hall has no position in any stocks mentioned. Selena Maranjian has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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