For this article I screened the ETF universe to find the ones with the following characteristics:
- 10 year compound annual growth rate (CAGR) greater than 15%.
- Year-to-date return greater than 25%.
- Assets under management (AUM) greater than $1 Billion.
- Average daily volume greater than 100,000.
- Expense Ratio less than 0.5%.
- A Morningstar analyst rating of Bronze, Silver, or Gold.
Out of a universe of more than 2,700 ETFs, I found 8 that passed all of the screens. Here are the top 3.
VanEck Semiconductor ETF (SMH)
Overview
The SMH ETF is an investment vehicle that provides investors with exposure to the dynamic and rapidly evolving semiconductor industry. As an exchange-traded fund, SMH seeks to track the performance of a designated index composed of semiconductor-related companies. This investment option allows investors to gain exposure to a diverse range of semiconductor companies without having to invest in each individual stock separately.
Investment Objective
The primary investment objective of the SMH ETF is to closely replicate the performance of the PHLX Semiconductor Sector Index (SOX). The index is composed of well-established semiconductor manufacturers, equipment providers, and other technology firms, making the SMH ETF a comprehensive way to invest in this crucial industry.
Key Features:
Diversification: The SMH ETF offers investors exposure to a broad array of semiconductor companies, reducing individual company-specific risks.
Liquidity: As an ETF, SMH offers high liquidity, allowing investors to easily buy and sell shares on stock exchanges throughout trading hours. The average daily volume for SMH is 7 million shares.
Low Costs: ETFs generally have lower expense ratios compared to actively managed funds, making the SMH ETF a cost-effective investment option.
Transparency: The ETF's holdings and performance are typically disclosed daily, providing investors with transparency into their investment.
Investment Considerations:
Industry Dynamics: The semiconductor industry is known for its cyclical nature, which can impact the ETF's performance based on shifts in demand, supply, and technological advancements.
Market Risks: The ETF's value can be affected by broader market trends, economic conditions, and geopolitical events that impact the technology sector.
Competition: The semiconductor sector is highly competitive, and the performance of individual companies can vary widely. The ETF's performance is influenced by the collective success of its constituent companies.
Technological Innovation: Rapid advancements in semiconductor technology can lead to shifts in market share and the competitive landscape, affecting the ETF's holdings.
SMH by the numbers
Total Assets $9.9 B Number of holdings 25 Expense Ratio 0.35% Dividend Yield 0.68% 10 year CAGR (dividends reinvested) 24.8% Year-to-date return 47.8% Morningstar analyst rating Silver
Top 5 Holdings
Company Name % of Fund NVIDIA Corp. 19.95% Taiwan Semiconductor ADR 10.55% Broadcom Inc. 5.34% Lam Research Corp. 4.83% ASML Holding NV ADR 4.76%
10 year chart of SMH
iShares Russell Top 200 Growth ETF (IWY)
Overview:
The IWY ETF is an exchange-traded fund that aims to provide investors with exposure to a diverse portfolio of large-cap U.S. growth stocks. As part of the iShares family of ETFs managed by BlackRock, IWY seeks to track the performance of the Russell Top 200 Growth Index. This index comprises companies with strong growth potential that are among the largest 200 U.S. stocks by market capitalization.
Investment Strategy:
The primary investment objective of the IWY ETF is to closely replicate the performance of the Russell Top 200 Growth Index. The ETF accomplishes this by investing in a portfolio of stocks issued by companies that exhibit above average growth characteristics. These characteristics may include higher-than-average revenue and earnings growth rates, innovative business models, and the potential for above-average returns.
Key Features:
Diversification: IWY offers investors exposure to a broad selection of large-cap growth companies, which can help spread risk and reduce the impact of individual stock performance.
Liquidity: As an ETF, IWY provides ample liquidity, allowing investors to buy and sell shares on stock exchanges throughout trading hours. The average daily volume for IWY is 212,000 shares.
Low Costs: The IWY ETF has a low expense ratio compared to actively managed funds, potentially making it an attractive option for cost-conscious investors.
Market Representation: By tracking the Russell Top 200 Growth Index, the ETF provides exposure to some of the most prominent and well-established growth companies in the U.S.
Investment Considerations:
Growth Focus: The IWY ETF is specifically focused on growth stocks, which can be more volatile than other types of investments, such as value or dividend stocks.
Sector Concentration: The performance of the ETF may be influenced by the sectors that are dominant within the Russell Top 200 Growth Index at any given time.
Market Trends: The ETF's performance is impacted by overall market trends, economic conditions, and factors that affect the growth potential of the companies within its portfolio.
Index Methodology: Changes in the index methodology or rebalancing can impact the composition and performance of the ETF's holdings.
Investors interested in the IWY ETF should conduct thorough research, consider their investment objectives, and risk tolerance, and may want to consult with financial professionals before making investment decisions.
IWY by the numbers
Total Assets $7.1 B Number of holdings 110 Expense Ratio 0.20% Dividend Yield 0.56% 10 year CAGR (dividends reinvested) 16.7% Year-to-date return 31.2% Morningstar analyst rating Silver
Top 5 Holdings
Company Name % of Fund Apple Inc 14.19% Microsoft 12.84% Amazon 6.67% NVIDIA 5.38% Alphabet Inc. 4.12%
10 year chart of IWY
iShares U.S. Home Construction ETF (ITB)
Overview:
The ITB ETF is an exchange-traded fund that offers investors exposure to the U.S. residential construction industry. Managed by BlackRock's iShares, ITB seeks to track the performance of the Dow Jones U.S. Select Home Construction Index. This index includes companies involved in various aspects of the homebuilding and construction sector, such as homebuilders, building materials producers, and suppliers.
Investment Strategy:
The primary investment goal of the ITB ETF is to closely mirror the performance of the Dow Jones U.S. Select Home Construction Index. The companies in this index are selected based on factors such as market capitalization, liquidity, and industry representation.
Key Features:
Sector Exposure: The ITB ETF provides investors with targeted exposure to the U.S. residential construction sector, allowing them to potentially benefit from the growth and trends within the housing market.
Diversification: By holding a range of companies involved in different aspects of home construction, the ETF helps investors reduce individual stock risks.
Liquidity: As an ETF, ITB offers liquidity, allowing investors to easily trade shares on stock exchanges during trading hours. The average daily volume for ITB is 2.5 million shares.
Cost Efficiency: The ITB ETF has a low expense ratio compared to actively managed funds, making it an efficient way for investors to gain exposure to the sector.
Investment Considerations:
Housing Market Dynamics: The performance of the ITB ETF is closely tied to trends in the U.S. housing market, which can be influenced by factors such as interest rates, economic conditions, and demographic trends.
Cyclical Nature: The residential construction sector is cyclical, which can lead to periods of volatility in the ETF's performance as it responds to shifts in demand and economic cycles.
Regulatory Environment: Changes in regulations, zoning laws, and government policies related to housing and construction can impact the ETF's holdings and performance.
Economic Indicators: The ETF's performance may be affected by broader economic indicators, such as employment rates, consumer sentiment, and real estate trends.
Investors interested in the ITB ETF should conduct thorough research, consider their investment goals, risk tolerance, and may want to consult financial professionals before making investment decisions.
ITB by the numbers
Total Assets $2.4 B Number of holdings 48 Expense Ratio 0.40% Dividend Yield 0.55% 10 year CAGR (dividends reinvested) 15.8% Year-to-date return 44.3% Morningstar analyst rating Silver
Top 5 Holdings
Company Name % of Fund D.R. Horton Inc 14.89% Lennar Corp Class A 12.16% NVR Inc. 7.26% PulteGroup Inc. 7.20% Sherwin-Williams 4.62%
10 year chart of ITB
Final Thoughts
If you had invested $10,000 in the S&P 500 ETF (SPY) ten years ago and reinvested the dividends, you would have $31,628 today – more than triple your initial investment. What’s remarkable about this outcome is the fact that you would have endured not one, but two bear markets along the way. Now let’s see how well you would have done if you had invested in these three high-performing ETFs instead of SPY.
- For ITB, your $10,000 investment would have grown to $43,377 – a 4-bagger in ten years.
- For IWY, your $10,000 would be worth $46,870.
- And for SMH, your $10,000 would be worth $91,708 – a 9-bagger.
The question is, can returns of this magnitude be achieved over the course of the next ten years? Most strategists would probably say no, because periods of above average returns are usually followed by periods of below average returns. But this maxim applies to the market as a whole. There is a wide dispersion of returns across the ETF universe, and even in a low return market there will be pockets of above average returns.
In my opinion, the next ten years will produce a few ETFs that outperform the broad market averages, just as these three have done for the past ten years. The challenge, of course, is guessing which market niche ETFs will be the next super-CAGRs.
Will semiconductors repeat? Many strategists say that the AI revolution is just getting started. Chip manufacturers are among the companies at the leading edge of this trend. Other areas like robotics & automation, cybersecurity, and renewable energy also have promise.
And what about the trillions of dollars that will likely be spent on upgrading our crumbling infrastructure of roads, bridges, tunnels, and the power grid? There is potential for ETFs in these and other market segments to generate outsized returns over the next decade.
If you have a favorite market segment for the next ten years, I encourage you to share your thoughts in the comments section below.
Erik Conley
Trader, analyst & portfolio manager, from 1975 - 2001. Former head of equity trading at Northern Trust Co. in Chicago. Now a private investor, founder of a nonprofit investor advocacy firm, and private investing coach. It gives me great satisfaction to teach retail investors the same skills and strategies that I used with my high net worth clients as a private wealth manager. It may be a cliche, but giving something back to the community is more rewarding to me than helping very rich people get even richer.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of ITB, SMH either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
