Dollar cost averaging is a popular investment strategy that involves investing a fixed amount of money at regular intervals, regardless of the price of the investment. Through investing in the best ETFs for dollar cost averaging, investors position themselves to benefiting immensely.
One way to implement dollar cost averaging is through exchange-traded funds (ETFs), which offer a diversified portfolio of stocks or bonds. In this article, we will explore 7 best ETFs for dollar cost averaging and can help investors get the most out of their investment.
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Understanding Dollar Cost Averaging
Before we delve into the best ETFs for dollar cost averaging, it’s important to understand what dollar cost averaging is and why it’s a beneficial strategy. Dollar cost averaging is a technique used by investors to reduce the impact of volatility on large purchases of financial assets such as equities.
By dividing the total amount to be invested in the market into equal amounts put into the market at regular intervals, it reduces the risk of incurring a substantial loss resulting from investing the entire “lump sum” just before a fall in the market.
Investing in the best ETFs for dollar cost averaging allows investors to take advantage of price dips without trying to time the market.
Best ETFs for Dollar Cost Averaging
Below we take a look at the 7 best ETFs for dollar cost averaging.
1. SPDR S&P 500 ETF Trust (SPY)
The SPDR S&P 500 ETF Trust (SPY) is one of the most popular and best ETFs for dollar cost averaging. It tracks the performance of the S&P 500 index, which is composed of 500 of the largest publicly traded companies in the United States. It is widely considered as the first ETF to be launched and is still one of the most actively traded, despite the introduction of competing S&P 500 ETFs. In fact, it is regarded as the first fund to follow the S&P 500.
SPY is traded on the Arca exchange of the New York Stock Exchange (NYSE), and investors can trade it on a variety of platforms. State Street Bank and Trust serves as the SPDR S&P 500 ETF Trust’s trustee, and ALPS Distributors serves as its distributor.
Because ETF shares trade similarly to stocks, investors can purchase and sell SPY shares through their broker at any time of day, including short sales. The SPY share price is designed to be one-tenth that of the S&P 500 Index. So, if the S&P is at 4,000, one SPY share should be worth around $400.
|SPY ETF’s Top 10 Holdings (as of Sept. 21, 2023)|
|Holding (Company)||% SPY Portfolio Weight|
|Alphabet—Class A (GOOGL)||2.13%|
|Alphabet—Class C (GOOG)||1.83%|
|Berkshire Hathaway—Class B (BRK.B)||1.83%|
|Meta Platforms—Class A (META)||1.81%|
By investing in SPY, investors can gain exposure to a broad range of industries and sectors, providing diversification and potential long-term growth. The S&P 500 is widely regarded as the best single gauge of large-cap U.S. equities. Therefore, SPY offers a simple, cost-effective way to own a piece of the largest companies in the U.S. and participate in their growth by investing in one of the best ETFs for dollar cost averaging.
2. iShares Core S&P Total U.S. Stock Market ETF (ITOT)
The iShares Core S&P Total U.S. Stock Market ETF (ITOT) is another one of the best ETFs for dollar cost averaging. This ETF seeks to track the performance of the S&P Total Market Index, which includes all U.S. common stocks listed on the NYSE, NASDAQ, and BATS exchanges.
Top 10 Holdings
|Alphabet Inc Class A||GOOGL||1.83%|
|Alphabet Inc Class C||GOOG||1.59%|
|Meta Platforms Inc Class A||META||1.48%|
|Berkshire Hathaway Inc Class B||BRK.B||1.45%|
|Exxon Mobil Corp||XOM||1.02%|
ITOT offers investors exposure to the entire U.S. stock market, providing diversification and the potential for long-term growth. This ETF is a great choice for investors who want to own a piece of the entire U.S. stock market, from the largest companies to the smallest making it one of the best ETFs for dollar cost averaging.
3. Vanguard Total Stock Market ETF (VTI)
The Vanguard Total Stock Market ETF (VTI) is a low-cost ETF that aims to track the performance of the CRSP US Total Market Index. This index includes all U.S. common stocks, providing investors with exposure to the entire U.S. equity market.
VTI is an extremely diversified fund. Its extensive holdings represent the complete universe of investable US securities. Small-cap stocks, which can be more volatile than mid- or large-cap holdings, are included in the portfolio. When compared to the bigger market, the fund has a beta of one.
With a 5.1% proportion, Apple (AAPL) is the largest position, followed by Microsoft (MSFT) with a 4.7% weighting. Alphabet (GOOGL) ranks third with a 3.4% percentage, while Amazon (AMZN) ranks fourth with a 3.2% weighting.
The fund is vulnerable to systemic risk, which is a risk inherent in the market as a whole. A greater downturn in the U.S. economy or the international economy is likely to harm the value of the fund.
VTI is one of the best ETFs for dollar cost averaging due to its low expense ratio and broad market exposure. Vanguard is known for its low-cost funds, and VTI is no exception. This makes it one of the best ETFs for dollar cost averaging for investors who are conscious of costs.
4. iShares Core MSCI EAFE ETF (IEFA)
For investors looking to diversify their portfolio internationally, the iShares Core MSCI EAFE ETF (IEFA) is one of the best ETFs for dollar cost averaging. This ETF seeks to track the performance of the MSCI EAFE Index, which includes large and mid-cap stocks from developed markets outside of the United States and Canada.
IEFA provides extensive exposure to developed market stocks outside of the United States at a quarter of the cost of the legacy iShares fund. IEFA also includes smaller-cap firms that its older sibling ignores, making it a favorite among long-term investors seeking exposure to developed areas outside of North America.
Because of IEFA’s huge size, institutional investors can easily acquire and sell large blocks. However, its more expensive twin is still preferred by active traders as one of the best ETFs for dollar cost averaging, those who prefer EFA due to its deep liquidity, tight tracking, and big options market.
|Novo Nordisk A/S Class B||NOVO-B.CO||1.68%|
|ASML Holding NV||ASML.AS||1.48%|
|LVMH Moet Hennessy Louis Vuitton SE||MC.PA||1.31%|
|Roche Holding AG||ROG.SW||1.16%|
|Novartis AG Registered Shares||NOVN.SW||1.15%|
|Toyota Motor Corp||7203.T||1.02%|
|BHP Group Ltd||BHP.AX||0.82%|
By investing in IEFA, investors can gain exposure to international markets and potentially benefit from global economic growth. This is one of the best ETFs for dollar cost averaging for investors who want to diversify their portfolio beyond U.S. stocks and gain exposure to developed markets in Europe, Australia, and the Far East.
5. Vanguard Total International Stock ETF (VXUS)
The Vanguard Total International Stock ETF (VXUS) is another one of the best ETFs for dollar cost averaging that provides investors with exposure to international markets. This ETF seeks to track the performance of the FTSE Global All Cap ex US Index, which includes stocks from both developed and emerging markets outside of the United States.
VXUS has earned investors an annualized return of 4.67% since its inception by tracking the performance of worldwide corporate stocks included on the FTSE worldwide All Cap ex US Index. The target benchmark index tracks large-, mid-, and small-cap shares of companies based in countries other than the United States.
VXUS’s international stocks offer investors a unique opportunity to diversify their portfolios in both developed and emerging economies around the world. The stock movement of companies based overseas does not necessarily have a direct association to local stock prices, allowing investors to profit from market movements that differ from shifts in US equity markets.
The Vanguard Total International Stock ETF invests at least 95% of total fund assets in an effort to replicate the performance of the FTSE Global All Cap ex US Index. VXUS is most highly weighted in Europe, with 39.8% invested there, followed by the Pacific (26.8%), emerging markets (25.3%), and North America (7.6%). Taiwan Semiconductor Manufacturing Co., Tencent Holdings, Nestlé, and Samsung Electronics are among the top holdings, which correspond to the fund’s target index.
VXUS offers investors a diversified portfolio of international stocks and can be an excellent addition to a dollar cost averaging strategy. This ETF is a good choice for investors who want to diversify their portfolio globally and gain exposure to both developed and emerging markets.
6. iShares Core U.S. Aggregate Bond ETF (AGG)
For investors looking to add fixed income exposure to their portfolio, the iShares Core U.S. Aggregate Bond ETF (AGG) is a suitable choice. This ETF seeks to track the performance of the Bloomberg Barclays U.S. Aggregate Bond Index, which includes a wide range of investment-grade U.S. bonds.
While AGG holds hundreds of individual securities, this ETF merely holds a subset of the bonds that comprise the underlying benchmark; the sampling approach used eliminates illiquid difficulties but may result in tracking error.
AGG is unrivaled in terms of liquidity, but investors can obtain comparable exposure at a lesser cost; BND and LAG both strive to duplicate the same benchmark while charging lower expense ratios. For investors seeking to avoid compounding fees and tracking mistake, the broad-based BND may be a superior choice for exposure to US fixed income.
By investing in AGG, investors can gain exposure to the U.S. bond market and potentially benefit from income generation and capital preservation. This is one of the best ETFs for dollar cost averaging for investors who want to diversify their portfolio with bonds, which can provide a steady stream of income and reduce portfolio volatility.
7. Vanguard Total Bond Market ETF (BND)
The Vanguard Total Bond Market ETF (BND) is another excellent option for investors seeking fixed income exposure. This ETF aims to track the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index, which includes a broad range of U.S. investment-grade bonds.
BND offers investors a diversified portfolio of bonds and can be a valuable addition to a dollar cost averaging strategy. Like AGG, BND is a good choice for investors who want to diversify their portfolio with bonds. Vanguard’s reputation for low-cost funds makes BND an attractive option for cost-conscious investors.
Dollar cost averaging is a powerful investment strategy that can help investors mitigate the impact of market volatility and potentially lower their average cost per share over time.
By investing in the best ETFs for dollar cost averaging, investors can gain exposure to a diversified portfolio of stocks or bonds, providing the potential for long-term growth and income generation. The ETFs mentioned in this article are well-suited for dollar cost averaging and can help investors get the most out of their investment.
Frequently Asked Questions – FAQ
Are there any specific ETFs recommended for DCA?
There isn’t a one-size-fits-all answer as the best ETFs for dollar cost averaging can vary depending on individual circumstances. However, some popular options for long-term DCA include the SPDR S&P 500 ETF Trust (SPY), iShares Core S&P 500 ETF (IVV), and Vanguard Total Stock Market ETF (VTI) for equities. For bond exposure, consider iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) or Vanguard Total Bond Market ETF (BND).
Can I use DCA with international ETFs?
Yes, DCA can be applied to international ETFs just like domestic ones. If you want to diversify globally, consider ETFs that track international stock indices, like the iShares MSCI ACWI ex U.S. ETF (ACWX) for global equity exposure.
What are the advantages of using ETFs for DCA?
ETFs offer several advantages for DCA, including diversification, lower expense ratios compared to mutual funds, and intraday trading flexibility. They are also tax-efficient due to their unique structure.
Are there any downsides to using ETFs for DCA?
One potential drawback of using ETFs for DCA is that you may incur trading commissions if your brokerage charges them. Additionally, if you choose highly specialized or niche ETFs, they may have lower liquidity, which can lead to wider bid-ask spreads.
How do I choose the best ETFs for DCA?
Selecting the right ETFs for DCA depends on your investment goals, risk tolerance, and time horizon. Consider ETFs that track broad market indices, such as the S&P 500 or a total stock market index, for long-term growth. Alternatively, you can choose bond ETFs or sector-specific ETFs based on your asset allocation strategy.