3 Great ETFs for 2023 and Beyond (2024)

Investors don’t have to give up long-term performance to manage current risks.

Bryan Armour: Investors continue to face several headwinds as we close the books on 2022 and look ahead to 2023. The bad news is that inflation remains high, the Fed continues to signal higher interest rates, and geopolitical concerns continue to grab headlines. The good news is that inflation appears to be slowing, the Fed’s interest-rate hikes are becoming less aggressive, and China has begun to relax their “zero-COVID” policies that have hampered the global economy.

What comes next is anyone’s guess. There are realistic reasons to expect a market rebound or a continued decline, or anything in between. Therefore, the best options for investors are broadly diversified funds that tilt away from companies susceptible to these headwinds and that stand to outperform in the long run, regardless of what happens next.

These exchange-traded funds earn Morningstar Analyst Ratings of Silver or Gold.

1. Dimensional US Core Equity 2 ETF (DFAC)
2. Schwab International Dividend Equity ETF (SCHY)
3. Vanguard Total Bond Market ETF (BND)

The first ETF on my list is Dimensional US Core Equity 2 ETF, ticker DFAC. This Gold-rated strategy first became available as an ETF in 2021, but it has outperformed its average category peer as a mutual fund since 2005.

The fund offers broad exposure to U.S. stocks of all sizes, and it tilts toward those with lower valuations, higher profitability, and smaller market capitalizations. It holds over 2,700 stocks, choosing to stay invested in all companies while pursuing market-beating factors such as value, profitability, and small size.

Tilting toward value stocks protects the portfolio from companies with long-term growth assumptions baked in that they may not be able to deliver on. Value stocks pose risks of their own, however, which Dimensional smartly offsets with its emphasis on profitability. The fund has handily beat the Russell 3000 by nearly 4 percentage points year to date and should continue to carve out a long-term edge via solid factor exposure at a low cost.

The second ETF on my list is Schwab International Dividend Equity ETF, ticker SCHY. This Silver-rated ETF shares the same strategy as its wildly popular U.S. sister fund, SCHD [Schwab U.S. Dividend Equity ETF], but applies it to international stocks.

With so much up in the air regarding U.S. interest rates, now is a good time to hedge against home bias by investing in international stocks. This ETF starts with a wide list of foreign stocks and searches for those with higher dividend yields, greater profitability and free cash flow, lower volatility, and a long history of regular cash dividend payments. This selection process provides exposure to multiple market-beating factors, including value, quality, and low volatility.

The result is a portfolio of 100 foreign stocks with consistent profitability and stable dividends. It also comes with a low fee of 14 basis points, giving it a durable cost advantage over its peers. It has outperformed its average peer and category index since the fund’s inception in April 2021.

The third ETF on my list is Vanguard Total Bond Market ETF, ticker BND. This Gold-rated ETF captures a broad swath of investment-grade, taxable U.S. bonds, mimicking the opportunity set available to active managers while leveraging the advantage of its 3-basis-point fee.

A looming recession raises the odds of widening credit spreads, so targeting investment-grade bonds with a healthy dose of credit-free Treasuries is a worthy strategy for managing risk. This fund parks about 70% of its assets in AAA rated bonds, tilting the portfolio away from riskier issuers. It carries moderate interest-rate risk that could cause the fund to falter if the Fed raises interest rates higher than expected. But it also provides potential upside if the Fed needs to pivot away from raising rates.

BND currently yields over 4%, which represents a major uptick in yield over recent years. Bonds are also now in a better position to hedge stocks because they’re starting at higher interest rates. This fund should provide steady income and performance in an uncertain market environment for years to come.

Watch “3 Great International-Stock ETFs” for more from this series.