3 Great ETFs Having a Horrible Year

Bryan Armour: Great ETFs are not immune to risk. They are sensibly constructed to avoid uncompensated risks, often serving to represent their market's opportunity set while minimizing costs for investors. But when the markets fall, so do the ETFs. It's not whether these funds get knocked down, it's whether they get back up.

Today, I will highlight three great ETFs having a horrible year that should still serve as leaders of their respective Morningstar Categories over the long haul. 3 Great ETFs Having a Horrible Year These exchange-traded funds earn Morningstar Analyst Ratings of Silver.

1. Vanguard International Dividend Appreciation ETF VIGI
2. Schwab US Large-Cap Growth ETF SCHG
3. Vanguard Intermediate-Term Treasury ETF VGIT

First on my list is Silver-rated Vanguard International Dividend Appreciation ETF VIGI. Foreign-stock funds have had a tough decade relative to the U.S. market, and a strong dollar continues to weigh heavily on foreign investments. But this fund has made the most of a bad situation, performing in the top decile of foreign large-growth funds for the year through October and the top quintile over the past five years.

VIGI targets stocks with seven years of dividend growth, pulling in profitable companies with the capacity and willingness to make dividend payments. This strategy won’t be the highest yielding of dividend funds, but it turns in a diversified portfolio of high-quality firms while minimizing costs for investors, which should make its overall performance hard to beat in the long run.

Second on my list is Silver-rated Schwab US Large-Cap Growth ETF SCHG. The incredible run by large-cap growth funds came to a screeching halt in 2022. This fund was no exception, losing almost 29% for the year through October. But even this brutal start to the year hasn’t thrown it off its mark: Its 3-year annualized return still exceeded 11%, good enough to fall in the top quintile of funds in the U.S. large growth Morningstar Category.

SCHG pulls in stocks representing the faster-growing half of the U.S. large-cap market and weights them by market cap, resulting in a portfolio that’s representative of its average category peer. Its competitive edge comes from its razor-thin fee of just 4 basis points, which is hard for peers to overcome without taking on additional risk. This remains a great option for growth stocks over the long run.

Last on my list is Vanguard Intermediate-Term Treasury ETF VGIT. Seemingly no good options existed for bonds this year. This fund lost over 12% year to date through October—a harsh reality for investors looking for Treasuries to buoy their stock portfolio during market turmoil. The silver lining is that this poor performance by the fund still ranked in the top decile of its Morningstar Category.

The Treasury market is highly liquid, making it a great option for indexing. Like the first two funds on this list, VGIT earns its keep by providing a diversified, market-value-weighted portfolio at a low cost. And higher yields mean higher upside for VGIT—something that couldn’t be said of Treasuries for the past several years.

Credit spreads remain relatively calm given the market’s performance. But that could change if the economy falters, which would be a perfect setup for a Treasury fund that’s long duration and carries no credit risk. But regardless of what happens next, VGIT has proven to be one of the best funds in its category over the long run.

Watch 3 Great Core Bond ETFs for more from Bryan Armour.