Is an exchange-traded fund with lots of assets necessarily a desirable one? On the one hand, obviously the largeness of an ETF is a selling point in and of itself, both literally and figuratively. Plenty of investors have already found such a fund worth owning a piece of, and that popularity becomes self-perpetuating – investors new to the market are going to be lured by an ETF with enough of a reputation to have amassed large holdings.

On the other hand, the larger the fund, the less fluid and more inert it and its holdings are going to be. And the less difference there’ll be between the returns of one colossal fund and the next. If every ETF ends up holding comparably sized portions of this petrochemicals multinational and that internet search company, the less opportunity there is for the investor to enjoy returns that beat the market. (Assuming that that’s even what he’s looking for in the first place.) Still, a large exchange-traded fund means reduced risk, which is part of what most ETF investors are hoping for anyway.

The largest ETF in existence was built for the express purpose of tracking an index. The SPDR S&P 500 (SPY) from State Street Global Advisors was created in 1993 – making it also the oldest ETF in the United States – and, as its name indicates, contains proportionate holdings of each of the issues listed on the Standard & Poor’s 500 index. (SPDR is “Standard & Poor’s Depositary Receipts.”) The index itself summarizes the prices of the stocks of 500 U.S. companies that each have a market capitalization of at least $4.6 billion. Forthwith, here are the fund’s largest components:

Apple (AAPL)

Exxon Mobil (XOM)

Microsoft (MSFT)

Johnson & Johnson (JNJ)

General Electric (GE)

Wells Fargo (WFC)

Chevron (CVX)

Berkshire Hathaway (BRK-B)

Procter & Gamble (PG)

JP Morgan Chase (JPM)

Verizon (VZ)

Pfizer (PFE)

Track the daily movements of the S&P 500, and you’ve essentially done the same for this particular ETF. It’s among the most conservative of securities that aren’t government bonds, created more to preserve wealth than enhance it.

The 2nd-largest ETF is a little more interesting. It’s Vanguard’s FTSE Emerging Markets fund (VWO), and again, an expository name helps to describe what the fund’s business is. FTSE stands for Financial Times/(London) Stock Exchange, the joint sponsors of a UK compiler of indices, sort of an Old World version of Standard & Poor’s. “Emerging Markets” is the universally accepted euphemism for second-tier countries whose economies show glints of brilliance outnumbered by wide stretches of poverty. The Vanguard FTSE Emerging Markets ETF consists of the stock of 955 largely Chinese and Taiwanese companies, many of them large but unfamiliar to North Americans. The stocks that make up the biggest proportion of the FTSE Emerging Markets fund are:

Tencent

China

Web portal

Taiwan Semiconductor

Taiwan

Semiconductors

China Construction Bank

China

Bank

China Mobile

China

Mobile phones

Industrial and Commercial Bank of China

China

Bank

Taiwan Semiconductor ADR

Taiwan

Semiconductors

Naspers

South Africa

Web portal/TV/

publishing

MTN

South Africa

Mobile phones

Bank of China

China

Bank

Hon Hai Precision Industry

China

Electronics manufacturing

America Movil

Mexico

Mobile phones

Sasol

South Africa

Energy

Are the emerging market stocks of this FTSE fund a better investment than the blue and comparably colored chips of the SPDR fund? The obligatory disclaimer about “past performance” aside, the SPDR ETF has doubled in value over the past 5 years, while the FTSE fund has failed to even keep pace with inflation.

Next up is the iShares Core S&P 500 ETF (IVV), which looks and sounds an awful lot like the SPDR S&P 500. Like its SPDR competitor, the iShares ETF tracks the S&P 500 perfectly, to the point where there’s no need to list the former’s largest components. So why would 2 investment firms sell an identical product?

They’re not completely identical. The iShares Core’s expense ratio is 2 basis points less than the SPDR’s, and you also can’t buy the latter without paying a commission. Which would seem to make the iShares Core ETF the better investment across the board, a position that’s reinforced when you examine other differences between the two ETFs. The SPDR ETF is set up as a unit investment trust and issues dividends at fixed quarterly dates, so when one of its underlying securities issues a dividend, the ETF has to hold onto the cash until the end of the quarter instead of reinvesting it. Which makes for a difference a few basis points in favor of the iShares Core ETF when markets are rising, SPDR when they’re falling. The difference is microscopic for the ordinary investor, less so for the institutional investor with millions on the line.

Homogeneity is inherent to large ETFs. Rounding out our quartet of the world’s largest is another iShares offering, MSCI EAFE (EFA), with net assets of $56 billion. That double initialism stands for another index, specifically Morgan Stanley Capital International/Europe, Australasia and Far East. A discussion of the ETF requires a brief explanation of the index itself, which is the oldest international stock index and contains issues from 21 developed countries excluding Canada and the United States. The fund offers an alternative for investors wary of putting their eggs in a basket dominated by just two countries – a pair consisting of a superpower with an increasingly intervening executive branch, and its neighbor whom, as the proverb goes, sneezes when the superpower catches a cold. Thus the MSCI EAFE ETF consists primarily of the following:

Nestlé

Switzerland

Food

Roche

Switzerland

Drugs

Novartis

Switzerland

Drugs

HSBC (Hong Kong &Shanghai Banking Corporation)

United Kingdom

Bank

Toyota

Japan

Cars

BP (British Petroleum)

United Kingdom

Energy

Royal Dutch Shell

Netherlands

Energy

Total

France

Energy

GlaxoSmithKline

United Kingdom

Drugs

Sanofi

France

Drugs

Banco Santander

Spain

Bank

Commonwealth Bank of Australia

Australia

Bank

The MSCI EAFE ETF has gained 45% over the past half-decade, a more than suitable return for those concerned about wealth preservation.

The Bottom Line

Given that there are 1200 exchange-traded funds in existence, with the potential to create infinitely many more (all you need are at least two stocks, in varying proportions), this particular collective investment scheme is clearly here to stay. The largest examples of the genre will continue to be those that offer diversity, risk reduction, and liquidity.

Related Articles
  1. Economics

    India: Why it Might Pay to Be Bullish Right Now

    Many investors are bullish on India for all the right reasons. Does it present an investing opportunity?
  2. Fundamental Analysis

    3 Long-Term Investing Strategies With Strong Track Records

    Learn why discipline and a statistically valid investment strategy can help an investor limit losses and beat the market over the long term.
  3. Investing Basics

    How To Invest In Penny Stocks

    Penny stocks are highly speculative and very risky for many reasons, including their lack of liquidity and small market capitalization.
  4. Mutual Funds & ETFs

    The ABCs of Mutual Fund Classes

    There are three main mutual fund classes, and each charges fees in a different way.
  5. Investing Basics

    5 Common Mistakes Young Investors Make

    Missteps are common whenever you’re learning something new. But in investing, missteps can have serious financial consequences.
  6. Investing News

    Market Outlook: No Bottom Until 2017?

    These investing pros are bearish on the market in 2016. Will there be a bottom in early 2017?
  7. Investing News

    What Does the Fire Monkey Mean for Your Portfolio?

    The Chinese new year this year corresponds to the monkey, a quick-witted, playful, tricky figure that means well but has a penchant for causing trouble.
  8. Investing Basics

    5 Questions First Time Investors Should Ask in 2016

    Learn five of the most important questions you need to ask if you are a new investor planning on starting an investment program in 2016.
  9. Investing Basics

    Building My Portfolio with BlackRock ETFs and Mutual Funds (ITOT, IXUS)

    Find out how to construct the ideal investment portfolio utilizing BlackRock's tools, resources and its popular low-cost exchange-traded funds (ETFs).
  10. Investing News

    Obama Floats $10 a Barrel Oil Tax

    President Obama intends to propose a $10 a barrel tax on oil; consumers might have to cough up 25 cents more per gallon.
RELATED FAQS
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. How is working capital different from fixed capital?

    There are several key differences between working capital and fixed capital. Most importantly, these two forms of capital ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center