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Money 50: Best Mutual Funds and ETFs

Jan 01, 2014

When Money magazine introduced the MONEY 70 list in 2007, the investing landscape sure was different. Exchange-traded funds were just coming onto the scene, and the merits of the strategy guiding them and index mutual funds were still the subject of great debate.

Fast-forward to today. ETFs, which are baskets of securities that you can buy and sell throughout the day, are now part of the mainstream. And indexing has won the argument. Only one in four actively managed U.S. stock funds has beaten this approach over the past five years, raising doubts about whether you need to sift through scores of funds to create a diversified and effective portfolio. That is in part why we overhauled the list.

Welcome to the new MONEY 50. In addition to being more concise, the list is organized differently. Rather than grouping funds based on the types of stocks or bonds they own, the new MONEY 50 categorizes funds based on how you might use them.

For instance, do you plan to use them as building blocks for the core part of your portfolio? Or will you hold them in small doses, to customize your strategy?

Despite those changes, the purpose of the list remains the same: to help you build a balanced portfolio that will get you to your most important financial goals, such as putting your kids through college or achieving a comfortable retirement.

We reconfigured the list into three broad categories, based on how elaborate you want your portfolio to be.

Building-block funds. This category, which contains 14 low-cost index funds and ETFs, is designed to help you assemble your core portfolio, which you're likely to hang on to for years and which represents the bulk of your assets.

Why just index funds? Low-cost indexes offer the purest and cheapest exposure to broad swaths of the markets, which you'll want for your core. Studies show that most active managers fall short of their benchmarks because of the higher fees, trading costs, and timing errors associated with frequent trading.

You should be able to construct a well-diversified portfolio with as few as three or four of the broad-market index funds found in the building-block section.

Custom funds. Even a well-diversified core portfolio may not be enough to meet all of your needs. You may prefer to keep a small stake in actively managed funds, for instance, in hopes of earning a bit more return. Or perhaps you want to further diversify your portfolio by using alternative assets, such as real estate or commodities.

This section includes 32 choices that allow you to craft a more specialized mix. If you are closing in on retirement and are seeking to boost income through dividend-paying stocks, you might choose SPDR S&P Dividend ETF.

Younger, more aggressive investors might opt for a fund that holds bargain-priced small-cap stocks, such as Vanguard Small-Cap Value ETF. Because of the added risks, limit your stake in these specialized funds. The bulk of your portfolio belongs in your core.

One-decision funds. Prefer to leave the work to the pros? Then avoid the first two categories altogether and opt for the third: all-in-one funds, which include two target-date retirement series and two balanced funds.

All these portfolios give you instant and sufficient diversification. But with target-date funds, the asset mix becomes more conservative as you approach retirement. Balanced funds, by contrast, maintain a constant allocation, typically around 60% to 65% stocks and 35% to 40% bonds. If you're unlikely or unwilling to monitor and tweak your portfolio over time, your best bet is a target-date fund that suits your age.

Making of the MONEY 50

MONEY ignores last year's hottest funds and instead looks for solid long-term performers with these important traits:

Low fees: Below-average expense ratios are a good predictor of better-than-average performance.

Average expenses for actively managed MONEY 50 funds: 0.91%
Average stock fund: 1.41%

Long tenure: Good returns don't mean much if the manager responsible for them is no longer around.

Average tenure for a MONEY 50 manager: 11.5 years
For fund industry: 5.7 years

Strong stewardship: You want fund managers who put the interests of shareholders ahead of their own. We use Morningstar stewardship grades for that.

Percent of actively managed MONEY 50 funds graded A or B: 62%
Percent of all actively managed stock funds graded that high: 16%

Building-Block Funds

Large-CapStyleExpense RatioYTD Return5 yr ReturnInitial Investment
Schwab S&P 500 Index FundBlend0.09%+4.92%+19.02%$100
Schwab Total Stock MarketBlend0.10%+4.25%+19.50%$100
Mid-Cap/Small-CapStyleExpense RatioYTD Return5 yr ReturnInitial Investment
iShares Core S&P Mid-Cap ETFBlend0.15%+2.85%+20.90%N.A.
iShares Core S&P Small-Cap ETFBlend0.17%-1.68%+21.44%N.A.
ForeignStyleExpense RatioYTD Return5 yr ReturnInitial Investment
Fidelity Spartan InternationalLarge Blend0.20%+3.20%+13.81%$2,500
Vanguard Total International StockLarge Blend0.22%+3.28%+12.91%$3,000
Vanguard FTSE All-World ex-U.S. Small-Cap IndexSmall/Mid-Growth0.40%+6.11%+16.63%$3,000
Vanguard Emerging MarketsEmerging Markets0.33%+3.60%+10.50%$3,000
SpecialtyStyleExpense RatioYTD Return5 yr ReturnInitial Investment
Vanguard REIT Index InvestorReal Estate0.24%+15.56%+22.53%$3,000
BondStyleExpense RatioYTD Return5 yr ReturnInitial Investment
Vanguard Total Bond MarketIntermediate Term0.20%+2.65%+4.68%$3,000
Vanguard Short-Term BondShort Term0.20%+0.57%+2.54%$3,000
Vanguard Inflation-Protected SecuritiesInflation Protected0.20%+5.32%+5.34%$3,000
Vanguard Short-Term Inflation ProtectedInflation Protected0.10%+1.30%N.A.N.A.
Vanguard Total International Bond IndexWorld0.23%+3.03%N.A.$3,000

Custom Funds

Large-CapStyleExpense RatioYTD Return5 yr ReturnInitial Investment
PowerShares FTSE RAFI U.S. 1000 PortfolioValue0.43%+4.69%+21.89%N.A.
Sound Shore Fund Investor ClassValue0.93%+6.20%+18.58%$10,000
T. Rowe Price Equity Income FundValue0.67%+3.20%+18.43%$2,500
Primecap Odyssey Growth FundGrowth0.66%+2.88%+19.62%$2,000
T. Rowe Price Blue Chip Growth FundGrowth0.74%+1.24%+20.18%$2,500
Mid-CapStyleExpense RatioYTD Return5 yr ReturnInitial Investment
The Delafield FundValue1.22%+2.21%+20.41%$1,000
Ariel Appreciation Fund Investor ClassBlend1.13%-0.22%+22.84%$1,000
Weitz Series Fund Hickory FundBlend1.26%-1.96%+20.07%$2,500
Primecap Odyssey Aggressive Growth FundGrowth0.65%+2.87%+26.13%$2,000
T. Rowe Price Diversified Mid Cap Growth FundGrowth0.91%+1.07%+19.97%$2,500
Small-CapStyleExpense RatioYTD Return5 yr ReturnInitial Investment
Royce Opportunity Fund Investment ClassValue1.17%-0.84%+24.59%$2,000
Vanguard Small-Cap Value ETFValue0.09%+3.86%+21.50%N.A.
Berwyn FundBlend1.20%-4.79%+21.94%$3,000
Wasatch Small Cap Growth FundGrowth1.24%-5.22%+19.92%$2,000
SpecialtyStyleExpense RatioYTD Return5 yr ReturnInitial Investment
PowerShares International Dividend Achievers PortfolioDividend0.56%+2.93%+16.62%N.A.
SPDR S&P Dividend ETFDividend0.35%+3.94%+18.47%N.A.
Cohen & Steers Realty Shares FundReal Estate0.97%+15.39%+21.60%$10,000
SPDR Dow Jones International Real Estate ETFReal Estate0.59%+7.16%+18.03%N.A.
iShares North American Natural Resources ETFNatural Resources0.48%+8.14%+14.18%N.A.
ForeignStyleExpense RatioYTD Return5 yr ReturnInitial Investment
Dodge & Cox InternationalForeign Large Blend0.64%+6.83%+16.91%$2,500
Oakmark InternationalForeign Large Blend0.98%+3.04%+19.66%$1,000
Vanguard International GrowthForeign Large Growth0.48%+1.16%+15.51%$3,000
T. Rowe Price Emerging MarketsEmerging Markets1.25%+4.31%+11.78%$2,500
BondStyleExpense RatioYTD Return5 yr ReturnInitial Investment
Dodge & Cox Income FundIntermediate Term0.43%+3.10%+7.09%$2,500
Harbor BondIntermediate Term0.56%+2.76%+6.36%$1,000
Vanguard Short-Term Investment GradeShort term0.20%+0.75%+4.62%$3,000
Loomis Sayles BondMultisector0.92%+3.71%+13.71%$2,500
Fidelity High IncomeHigh Yield0.72%+1.28%+14.04%$2,500
Vanguard Intermediate-Term Tax-Exempt Fund Investor SharesMuni Natl Intermediate0.20%+3.43%+4.89%$3,000
Vanguard Limited-Term Tax-Exempt FundMuni Natl Short0.20%+0.64%+2.37%$3,000
Templeton Global Bund FundWorld0.89%+1.37%+8.15%$1,000
Fidelity New Markets IncomeEmerging Markets0.86%+6.74%+12.16%$2,500

One-Decision Funds

BalancedStyleExpense RatioYTD Return5 yr ReturnInitial Investment
T. Rowe Price Cap. AppreciationBalanced0.71%+5.65%+16.49%$2,500
Vanguard Wellington FundBalanced0.26%+4.32%+14.81%$3,000
T. Rowe Price Retirement 2020 FundTarget Date0.69%+4.07%+15.18%$2,500
Vanguard Target Retirement 2035 Fund Investor SharesTarget Date0.18%+4.18%+16.05%$1,000

NOTE: For funds that do not receive any stewardship grade from Morningstar, MONEY relies on its own assessment.

SOURCE: Morningstar. Data as of May 31, 2014.

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