What Are the Best ETFs to Buy and Hold for the Long Term?

Exchange Traded Funds (ETFs) are an investment vehicle for individuals seeking diversified exposure to financial markets. These funds are investment baskets that trade on stock exchanges, similar to individual stocks. The “buy and hold” investment strategy involves purchasing investments with the intention of holding them for an extended period, typically several years or decades. This approach aims to benefit from long-term market growth and compounding returns, while minimizing the impact of short-term market fluctuations.

Core Principles for Long-Term ETF Investing

ETFs are well-suited for long-term “buy and hold” strategies due to several inherent characteristics. Diversification is a key characteristic, as ETFs typically hold a collection of securities, spreading investment risk across various assets. For example, an ETF tracking a broad market index might include hundreds or thousands of companies, reducing reliance on any single stock’s performance. This diversification mitigates the impact of poor performance from individual holdings, managing risk over extended periods.

Cost efficiency is another advantage of many ETFs for long-term investors. Passive ETFs, which aim to replicate the performance of a specific index, generally have lower expense ratios compared to actively managed mutual funds. An expense ratio is the annual fee deducted from the fund’s assets, and even small differences can impact total returns over many years due to compounding. For instance, the average expense ratio for index equity ETFs was around 0.15% in 2023, while actively managed equity ETFs averaged 0.43%.

Transparency also aligns ETFs with a long-term investment view. ETF holdings are typically disclosed daily, providing investors with a clear understanding of the underlying assets. This disclosure allows investors to monitor holdings and ensures the fund aligns with their investment goals. This visibility supports informed decision-making for a long-term strategy.

ETFs offer liquidity, trading on exchanges throughout the day like individual stocks. This flexibility allows investors to buy or sell shares at market prices during trading hours for initial purchases or portfolio rebalancing. While long-term investors may not trade frequently, efficient entry or exit is a practical benefit. This contrasts with mutual funds, which typically trade only once a day after market close.

The simplicity of ETFs enhances their appeal for a “buy and hold” approach. They offer a straightforward way to gain exposure to diverse markets or asset classes without researching and selecting individual stocks or bonds. This ease of access suits investors preferring a less hands-on approach to managing long-term portfolios. Many platforms offer commission-free trading for ETFs, reducing transaction costs.

Key Considerations for ETF Selection

Selecting the right ETF for a long-term portfolio involves evaluating several specific criteria. The expense ratio is a primary consideration, directly impacting an investment’s compounding ability. These annual fees cover management, administrative, and operational costs, deducted from the fund’s assets, reducing net return. Low expense ratios, especially for passively managed funds, maximize long-term gains. For example, a 0.5% higher fee could reduce a retirement nest egg by approximately 25% over a long period.

Tracking error and tracking difference are important metrics for index-tracking ETFs. Tracking difference measures the return difference between an ETF and its underlying index, often due to fees. A negative tracking difference indicates the ETF underperformed its index, which is common due to fees. Tracking error measures the volatility of these return differences, indicating how consistently the ETF replicates its index. A lower tracking error suggests a more faithful replication of the benchmark, ensuring the investment performs as expected.

Understanding the underlying index or investment strategy is important for aligning the ETF with an investor’s long-term objectives. ETFs can track various indices, such as broad market indices (e.g., S&P 500), specific sectors, or bond indices. Some ETFs also employ active management strategies. Investors should ensure the ETF’s strategy aligns with their desired market exposure and risk tolerance.

Liquidity and trading volume are important practical considerations. Sufficient trading volume ensures efficient buying and selling, reducing bid-ask spreads. The bid-ask spread is the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept. A narrower spread indicates higher liquidity and lower transaction costs.

While average daily volume is a common indicator, an ETF’s true liquidity is determined by its underlying securities. Spreads are generally widest at market open and can fluctuate with market volatility.

Assets Under Management (AUM) can provide insight into an ETF. AUM represents the total market value of assets managed by the ETF. Larger AUM often suggests greater stability and lower operating costs due to economies of scale. While AUM is not a direct measure of liquidity, funds with substantial assets tend to be more established and less likely to face closure risk.

The reputation of the fund provider is a factor to consider. Choosing ETFs from reputable providers offers reliability, strong customer support, and a broader range of products. Major ETF providers include BlackRock (iShares), Vanguard, State Street, Invesco, and Charles Schwab. These larger firms often have extensive resources dedicated to fund management and investor education.

Common ETF Options for Buy and Hold Portfolios

For long-term buy-and-hold investors, several ETF categories serve as foundational components for a diversified portfolio. Broad market equity ETFs track major stock market indices, such as the total U.S. stock market or the S&P 500. These ETFs provide exposure to the domestic equity market, allowing investors to participate in overall economic growth. They are often considered core holdings due to their wide diversification across sectors and companies.

International or global equity ETFs extend diversification beyond domestic borders. These funds invest in companies in developed or emerging international markets. Including international ETFs reduces concentration risk in a single country and captures global growth opportunities. This global exposure contributes to a robust and resilient long-term portfolio.

Bond ETFs offer diversification, providing income generation and portfolio stability. These funds hold various types of bonds, including government, corporate, and municipal. Bond ETFs can balance equity volatility, especially as part of an asset allocation strategy tailored to an investor’s risk tolerance and time horizon. Unlike individual bonds, bond ETFs typically do not have a maturity date, as they continuously hold a basket of bonds with varying maturities.

Dividend or income-focused ETFs appeal to investors seeking regular income and capital appreciation. These ETFs invest in companies with consistent dividend payments or high dividend yields. While dividends are not guaranteed, these funds can provide a steady cash flow stream, attractive for long-term investors, including those in retirement. Some dividend ETFs prioritize companies with a long history of increasing dividends, while others focus on high current yields.

Sector-specific or thematic ETFs focus on particular industries or emerging trends. While these offer targeted exposure, they generally require more active management and may not align as seamlessly with a passive “buy and hold” strategy as broad market funds. They can be used for specific, long-term conviction plays within an otherwise diversified portfolio, but their narrower focus means they carry higher concentration risk compared to broader market funds.