Investing

Kiplinger’s Personal Finance: Investing in ETFs that beat the market | Business

If you’re trying to best the overall stock market, you can take your chances by picking individual issues, or you could buy an actively manag ed mutual fund.

But some exchange-traded funds may get the job done, too, and it won’t cost you much to give them a shot.

ETFs are like mutual funds, but they trade like stocks. The biggest and cheapest ETFs mirror major benchmarks, such as Standard & Poor’s 500-stock index. Annual fees for many ETFs are extraordinarily low — as little as 3 cents per year for every $100 invested.

Yet you don’t need to pay much more for ETFs that aim to beat the major bogeys.

Such ETFs hold baskets of stocks that often look very different from the S&P 500.

Some of these funds focus on shares of undervalued small companies. Others tilt toward stocks with upward share-price momentum, or companies with high-quality balance sheets. You can also buy “low volatility” ETFs that should hold up relatively well in a market downturn.

The common theme with these funds is that they emphasize stocks with attributes such as value, momentum or quality.

Many studies have found that stocks with one or more of these “factors” tend to produce superior long-term results compared with the market averages.

That may mean only an extra percentage point or so of gains per year, but that adds up if you stash them away for a decade or more.

Markets tend to favor one style or strategy for long periods, so don’t expect these funds to excel under all conditions. Value stocks, for instance, have trailed growth stocks over the past decade.

Small-capitalization stocks, which beat large caps for much of the 20th century, haven’t lived up to their reputation as giant slayers for the past 15 years.

We’ve identified five ETFs that we like for their potential to surpass the major indexes: Goldman Sachs ActiveBeta Large-Cap Equity (symbol GSLC, expense ratio: 0.09 percent); iShares Edge MSCI Minimum Volatility USA (USMV, 0.15 percent); iShares Edge MSCI USA Momentum Factor (MTUM, 0.15 percent); iShares Edge MSCI USA Quality Factor (QUAL, 0.15 percent); Vanguard Russell 2000 Value (VTWV, 0.2 percent).

Some will thrive in strong bull markets; others should excel in downturns.

For investors who don’t want to make timing wagers, the Goldman Sachs ETF wraps several strategic bets in one package. The amount you should invest in each fund depends on your appetite for risk.

Remember, too, that patience is key: You may have to hold these ETFs for years to reap their rewards.

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