It is a fact that college costs are rising and the pace of college cost inflation far outstrips U.S. wage growth and even above-average equity market returns.
Tuition for four years at some of the most prestigious U.S. colleges and universities easily exceeds the income many working families will generate over those four years. According to Business Insider, the average four-year cost for students attending the University of Chicago, Dartmouth College and the University of Southern California is nearly $186,000.
More than ever, it is incumbent on families to start college planning and saving early. Grandparents can help and exchange traded funds can help those savvy (and generous) grandparents kick-start the grandkids’ college savings.
Per the request of some of our readers, we scoured the universe of ETFs for those funds ideal for college planning. With long-term time horizons in mind, all of the ETFs featured here share at least two traits in common. First, all have low fees. Second, all are equity-based funds.
Let’s get started with the…
Vanguard Total Stock Market ETF (NYSEArca: VTI)
Annual Fee: 0.05%
Comment: With a paltry expense ratio of 0.05%, VTI is not only less expensive than most S&P 500 ETFs, it is cheaper than 95% of all competing funds. The ETF tracks the CRSP U.S. Total Market Index and holds 3,765 component stocks. As the name suggests, the fund holds pretty much everything in the U.S. markets, with at least a $10 million market-cap, weighted by market capitalization. However, the index may exclude business development companies, American Depository Receipts, royalty trusts and limited partnerships.
PowerShares QQQ (NasdaqGM: QQQ)
Annual Fee: 0.2%
Comment: Given it is substantial weights to the technology (almost 60%) and consumer discretionary (17.3%) sectors, QQQ may not be considered an overweight position for retirement portfolios. However, the leverage the NASDAQ-100 tracking ETF offers to growth stocks, the ETF also features a 15.4% health care allocation of which most is in biotechnology stocks, is ideal for young investors with lengthy time horizons.
Don’t forget tech’s rise as a credible dividend sector. QQQ’s current trailing 12-month dividend yield is about 50 basis points higher than where it was at the top of the tech bubble. [Like a Teenager, QQQ Goes Through Change, but for the Better]
iShares Core MSCI EAFE ETF (NYSEArca: IEFA)
Annual Fee: 0.14%
Comment: Again remembering that the objective of this portfolio is asset-building over an extended time period, it is essential to weave some international exposure into the mix. IEFA, one of the lower fee developed market options on the market today, does that.
As part of its so-called Core suite of ETFs, IEFA is considered a suitable “core” portfolio holding for access to developed markets outside of North America, which include developed Europe, Australasia and Far East, or EAFE. The ETF tracks the MSCI EAFE Investable Market Index and is exposed to a portfolio of 2,476 stock components.
Schwab Emerging Markets Equity ETF (NYSEArca: SCHE)
Annual Fee: 0.14%
Comment: Keeping with themes we mentioned with IEFA, a college savings ETF portfolio with time on its side can tolerate some emerging markets exposure and it is best to accomplish that objective on the cheap with SCHE.
SCHE is the cheapest emerging market equity ETF on the market. Moreover, investors on the Schwab platform can trade the ETF commission-free, along with the other Schwab ETF offerings. The fund covers about 900 emerging market stocks from 22 developing countries. Since SCHE reflect the performance of a FTSE index, it does not include South Korean securities, which FTSE labels as a developed market.
SCHE can be traded commission-free on the Schwab ETF OneSource platform for additional savings. [Popular Commission-Free ETFs on Schwab OneSource]
SPDR S&P Dividend ETF (NYSEArca: SDY)
Annual Fee: 0.35%
Comment: When noting dividends account for a significant percentage of a portfolio’s returns over long time horizons, including a dividend ETF (or two) in a college savings portfolio is essential.
SDY, one of the four largest U.S. dividend ETFs, targets the highest-yielding stocks from the S&P 1500 Composite Index that have raised their dividends for every year over the past 25 consecutive years.
Vanguard Small-Cap Growth (NYSEArca: VBK)
Annual Fee: 0.09%
Comment: Sticking with the time advantage inherent in a college savings portfolio, this collection of ETFs should include some small-cap exposure. Investors with some tolerance for risk can employ a growth bias to small-caps with VBK, an ETF that is less expensive than 93% of competing funds according to Vanguard data.
WisdomTree U.S. Dividend Growth Fund (NasdaqGS: DGRW)
Annual Fee: 0.28%
Comment: DGRW is a much different dividend animal than the aforementioned SDY, but the former merits a place in a portfolio of this nature as well. DGRW allocates 22% of its weight to the tech sector, one of the largest tech allocations among dividend ETFs, a trait that ensures feature dividend growth.
Likewise, the ETF is home to a combined 36% weight to staples and industrial stocks, sectors seasoned income investors have flocked to for decades.
DGRW has another advantage: It pays its dividend monthly, which can boost returns with a portfolio that has a lengthy time horizon. [ETFs for Monthly Dividend Hunters]
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of QQQ.