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If you were one of the millions of investors whose portfolios were heavily tilted towards S&P 500 ETFs and large-cap tech stocks, congratulations! By simply investing in market beta products, you probably outperformed anybody who diversified into small-caps, value stocks, emerging markets or commodities.

2021 was not the year where diversification paid off. Over the long-term, it will and probably will again in 2022, but this past year featured the equity markets being driven by about 5-10 stocks. A lot of stocks, especially Nasdaq stocks, are trading below their 200-day moving averages. Many are more than 10% below their all-time highs. A not-insignificant number are trading at more than 50% below their highs. Market breadth is weaker than many think, but the mega-cap tech and growth names largely hid that weakness in 2021.

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It won't always be that way. The idea of mean reversion by itself suggests there's a comeback in store for the likes of small-caps, value, international equities and even gold. Conditions won't be easy though. Stocks tend to struggle once we get a little deeper into an interest rate tightening cycle. 7% inflation rates are likely to take their toll on consumer spending eventually. Plus, we still don't know what the overall impact of COVID and the omicron variant will be.

Powered by trillions of dollars of stimulus cash and monster inflows, there's still a case to be made that large-caps have the potential for further gains ahead. GDP growth is still expected to come in around the 3% mark for 2021, above the long-term historical averages and enough to support additional earnings growth in the new year. Whether that can outweigh the headwinds the financial markets will be facing in 2022 will be the big question.

The ETF Action database categorizes more than 400 ETFs as "large-cap" and that doesn't even include the total market funds, such as the Vanguard Total Stock Market ETF (VTI). Obviously, there's little advantage to covering all of them, but running through the top 200 should still be more than enough. The list will include everything from broad vanilla ETFs to dividend ETFs to sector ETFs and all sorts of thematic tilts. As far as ETF coverage goes, this list should provide everything you need!

Ranking The Large Cap ETFs

The variety of ETF choices makes distinguishing the best from the rest a little challenging. You've probably heard most financial pundits talk about focusing on funds with low expense ratios. That can certainly be a big factor in deciding which ETF to go with (it's probably the most important factor, in my view), but there are a lot of things that could go into making the right choice.

That's where I'm going to try to make things easier for you. Using a methodology that I've developed, which takes into account many of the factors that should be considered and weighting them according to their perceived level of importance, we can rank the universe of available ETFs in order to help identify the best of the best for your portfolio.

Now, this certainly won't be a perfect ranking. The data, of course, will be objective, but judging what's more important is very subjective. I'm simply going off of my years of experience in the ETF space in helping investors craft smart, cost-efficient portfolios.

Methodology And Factors For Ranking ETFs

Before we dive in, let's establish a few ground rules.

First, all of the data is used is coming from ETF Action. They have gone through the ETF universe to identify and categorize those ETFs used here. There are many that qualify and we'll be using their categorization as a starting point. Many thanks to them for opening up their vast database for my use.

Second, let's run down the factors I used in the ranking methodology.

  • Expense Ratio - This is perhaps the most important factor since it's the one thing investors can control. If you choose a fund that charges 0.1% annually over a fund that charges 1%, you're automatically coming out ahead by 0.9% annually. You can't control what a fund returns, but you can control what you pay for the portfolio. Lower expense ratios equal more money in your pocket.
  • Spreads - This relates to how cheaply you can buy and sell shares. Generally speaking, the larger the fund, the lower the spreads. Bigger funds usually have many buyers and sellers. Therefore, it's easier to find shares to transact and that makes them cheaper to trade. On the other hand, small funds tend to trade fewer shares and investors often need to pay a premium to buy and sell. Considering expense ratios and spreads together usually give you a better idea of the total cost of ownership.
  • Diversification - Generally speaking, the broader a portfolio is, the better chance it has at reducing overall risk. A fund, such as the Energy Select Sector SPDR ETF (XLE), provides a good example. 45% of the fund's total assets go to just two stocks - ExxonMobil and Chevron. By buying XLE, you're putting a lot of faith in just those two companies. An equal-weighted fund, such as the Invesco S&P 500 Equal Weight Energy ETF (RYE), would score higher on diversification than XLE.
  • FactSet ETF Scores - FactSet calculates its own proprietary ETF ranking for efficiency, tradeability and fit. They basically are designed to tell us if an ETF is doing what it sets out to do. I'm not going to copy and paste that work that they're doing, but there is some influence there to make sure my rankings are on the right path.

There are a few other minor factors thrown into the mix, but these are the main factors considered.

One thing that is not considered is historical returns. Most ETFs are passively-managed and are simply trying to track an index, not outperform. ETFs shouldn't be penalized for low returns simply because the index they're tracking is out of favor at the moment.

I'm ranking ETFs based on more basic structural factors. Are they cheap to own? Are they liquid? Do they minimize trading costs? Do they maintain risk-reducing diversification benefits?

Being in the bottom half of the list doesn't automatically make a fund "bad". It simply means that due to a low asset base, a high expense ratio, a concentrated portfolio or some other factor, it poses additional costs or downside risks.

Top Large Cap ETF Rankings For 2022

As always, ETFs with rock bottom expense ratios dominate the list. With so many funds in the large-cap universe, there will be a fair amount of splitting hairs going on, especially near the top of the list where nearly 40 ETFs charge 0.10% annually or less.

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It's not surprising that one of the big three S&P 500 ETFs landed in the top spot and it did, although maybe not the one you expect. The iShares Core S&P 500 ETF (IVV) hits #1, while the Vanguard S&P 500 ETF (VOO) comes in at #4. The SPDR S&P 500 ETF (SPY) is the largest ETF in the world, but lands only at #9 due to its modestly higher expense ratio.

The rest of the top 20 is dominated by value ETFs. A total of 8 value-oriented funds, including the Schwab U.S. Large-Cap Value ETF (SCHV) at #2 and the Vanguard Value ETF (VTV) at #3, head the list compared to just a pair of growth ETFs - the Vanguard Growth ETF (VUG) and the SPDR Portfolio S&P 500 Growth ETF (SPYG) at a comparatively low #19 and #20, respectively.

There are only two ETFs in this first batch that don't come from either Vanguard, BlackRock, State Street or Schwab. The Invesco S&P 500 Equal Weight ETF (RSP) at #17 does pretty much what the name says and the Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC), a fund that tilts towards stocks demonstrating attractive value, momentum, quality and low volatility.

The next 30 names include plenty of low cost ETFs, including many of the SPDR sector ETFs and one of the biggest ETFs there is.

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In a world of so many low cost ETFs, the 0.20% expense ratio of the Invesco QQQ Trust (QQQ) puts it at a bit of a disadvantage. The Invesco Nasdaq 100 ETF (QQQM), which is essentially a clone of QQQ and comes with a cheaper expense ratio (and comes in a little later down this list) is probably the better long-term holding.

ESG became a much larger theme in 2021 and the Xtrackers S&P 500 ESG ETF (SNPE) at #34 is the highest ranking socially conscious fund on the list. It excludes companies that engage in tobacco, weapons, coal and human rights issues and is one of the cheapest options on this theme at just 0.10%. The SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX), which excludes oil companies, comes in a little further down the list.

One of the best performing funds of the year has been the Invesco S&P 500 High Beta ETF (SPHB). Riskier, higher volatility have mostly been in favor consistently throughout the year and this fund is on pace for a 40% return in 2021. Its counterpart, the Invesco S&P 500 Low Volatility ETF (SPLV), comes in just a few spots higher on this list.

Eight of the SPDR sector ETFs fall in this block of the list. The only exceptions are the Industrials Select Sector SPDR ETF (XLI), which is the highest ranked at #21, and the Communication Services Select Sector SPDR ETF (XLC) and the Energy Select Sector SPDR ETF (XLE), which just narrowly missed the cut.

Down into the 60s to 80s on this list, there are a number of smart beta and thematic offerings that offer tilts on the major indices. A few of the largest and most popular dividend ETFs show up as well.

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I mentioned QQQ and QQQM already, but the Invesco NASDAQ Next Gen 100 ETF (QQQJ) could be a real up-and-comer. It focuses on the 100 largest non-financial Nasdaq stocks currently outside of the main Nasdaq 100 index. The Direxion Nasdaq 100 Equal Weighted Shares ETF (QQQE) also comes in at #83.

Among the largest dividend ETFs showing up here - the Invesco S&P 500 High Dividend Low Volatility ETF (SPHD), the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) and the First Trust Rising Dividend Achievers ETF (RDVY).

And the rest of the large cap ETF rankings:

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The ALPS Sector Dividend Dogs ETF (SDOG) is a bit under-the-radar due to the focus on growth and tech, but could be an interesting performer in 2022.

The Invesco S&P 500 Downside Hedged ETF (PHDG) invests in a combination of cash, equities and VIX futures contracts to help generate positive returns during periods of high volatility.

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The Global X Nasdaq 100 Covered Call ETF (QYLD) is one of the highest yielding ETFs in the entire marketplace, currently yielding more than 11%.

The JPMorgan U.S. Dividend ETF (JDIV) is a smartly constructed, ultra-low cost ETF that for some reason just hasn't managed to catch on with investors.

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The Pacer U.S. Cash Cows 100 ETF (COWZ) is a fund I own and attempts to capture the return potential of high free cash flow generators.

The Engine No. 1 Transform ETF (VOTE) is a unicorn in the ETF space. It uses its leverage as an investor to institute change in the companies it owns.

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The Siren DIVCON Leaders Dividend ETF (LEAD) perhaps deserves a higher spot on this list. It's been an incredibly strong performer for a dividend ETF this year.

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