The World's Largest ETFs

By Greg McFarlane AAA

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.  

 

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