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The 5 best performing ETFs of the past decade, and what most of them have in common

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The past 10 years has seen massive growth in the exchange-traded fund (ETF) industry, as investors have flocked to these low-cost, passive investments.

The number of ETFs that track U.S.-based stock benchmarks have more than doubled, from 901 funds in 2010 to nearly 2,100 by the end of March, according to the latest figures from research firm ETFGI. And the amount of money invested in ETFs has ballooned to about $3.6 trillion, compared with $893 billion a decade ago.

And though stocks fell into a bear market this year amid the turbulence caused by the coronavirus pandemic, that's done little to mar the market's long-term returns: The 2010s were one of the best decades ever for investors.

However, certain industries have even outpaced the broader market's gains. And the leaders of the past decade have largely been technology stocks

Here are the five best-performing ETFs of the past 10 years.

Tech was the big winner

ETFs that track companies in the broader technology industry saw the biggest gains in the U.S. stock market since 2010. Several of these funds experienced returns that were more than double that of the S&P 500. 

Grow analyzed FactSet data of U.S. equity ETFs for the 10 years since June 2010, and the five best-performing funds were:

  • First Trust Dow Jones Internet Index Fund (FDN): Up 517%. This ETF tracks an index of the largest U.S. internet companies, including companies like Amazon, Facebook, PayPal, Netflix, and Cisco.
  • Invesco NASDAQ Internet ETF (PNQI): Up 506%. This fund is similar to the above but currently tracks 90 internet companies (compared with 42). The biggest holdings are: Amazon, Facebook, Adobe, Alphabet (parent company of Google), and Alibaba. 
  • iShares PHLX Semiconductor ETF (SOXX): Up 455%. This ETF tracks an index of U.S.-based semiconductor stocks, or the manufacturers of chips used in many technology devices. The fund includes companies like: NVIDIA, Texas Instruments, Broadcom, Qualcomm, and Intel. 
  • SPDR S&P Biotech ETF (XBI): Up about 446%. The lone health care-focused fund to make the top five, this ETF tracks U.S. biotechnology companies. Its biggest holdings currently include: Moderna, Regeneron Pharmaceuticals, Immunomedics, Seattle Genetics, and United Therapeutics. 
  • Invesco Dynamic Semiconductors ETF (PSI): Up 435%. Like the above SOXX fund, this ETF also tracks the semiconductor industry but has a different model for selecting and weighting stocks in the fund. Its holdings currently include: Qualcomm, Texas Instruments, Micron Technology, Broadcom, and Advanced Micro Devices.

A $500 investment in the above funds would now be worth anywhere from about $2,810 to $3,149 as of June 11, 2020. That assumes you reinvested the dividends — a portion of a company's or fund operator's profit — you earned each quarter, which is an easy way to grow the value of your portfolio.

During the comparable period, the biggest fund tracking the S&P 500 — the SPDR S&P 500 ETF Trust — rose 174%. And a hypothetical $500 investment in this fund would now be worth about $1,677.

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Gains in the market have come from growth stocks

Tech stocks clearly dominated the market in the past decade: Netflix was the top performer of the S&P 500 during the 2010s. And the success of tech stocks helped to spur broader gains across the market. 

Many of the popular tech stocks have become synonymous with the definition of growth investing. With this strategy, investors knowingly pay a premium to buy the fastest growing stocks because they expect these companies will continue to outpace the broader market.

While investing in an ETF that tracks companies in a specific industry doesn't offer the broad market diversification that experts recommend, it's still safer than buying individual stocks because you won't have to worry about picking the winning stocks from the losers. And you'll be able to keep costs low, so fees won't cut into your returns over time.

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Why a buy-and-hold strategy pays off

It can be tempting to chase the gains of the past 10 years, but it's important to understand the associated risks and that the best performers 10 years from now could be in other industries. 

A safer and more reliable investment strategy is to buy index funds. And if you keep adding money to your portfolio regularly — a strategy known as dollar-cost averaging — you'll ensure you don't invest all of your money when prices are at a peak.

Finally, rather than trying to make a quick buck on a risky investment, it's smart to focus on the long term. Experts recommend building a portfolio made up of a diversified mix of stocks that tracks the market, because it's generally a much safer bet than investing in individual stocks, and then sticking with your investments over time.

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