Top ETFs And What They Track: A Tutorial
  1. Top ETFs and What They Track: Introduction to ETFs
  2. Top ETFs and What They Track: Global And Emerging Market ETFs
  3. Top ETFs and What They Track: Stock Index ETFs
  4. Top ETFs and What They Track: Volatility ETFs
  5. Top ETFs and What They Track: REIT ETFs
  6. Top ETFs and What They Track: Commodity ETFs

Top ETFs and What They Track: Introduction to ETFs

By Dan Blystone | Updated September 2, 2014 — 9:53 AM EDT

Not sure what ETF to invest in given the underlying asset or industry that you’re interested in? This guide will provide an introduction to the leading ETFs by assets under management (AUM), broken down by market category.

Before we dive in to discover the top ETFs, let’s make a brief review of what ETFs are and what makes them an interesting investment.

What Are ETFs?

An Exchange-Traded Fund (ETF) is an investment fund that tracks an index, specific asset or basket of assets to which it is pegged. ETFs are bought and sold throughout the day like securities on the stock exchange.

ETFs cover many areas of the market including stock indexes, stock market sectors, commodities, currencies, bonds and even instruments that track the volatility of the stock market.

In some ways, ETFs might appear comparable to mutual funds, in that both involve a pool of assets. But these two types of funds actually operate quite differently. Unlike a mutual fund that has its net-asset value (NAV) calculated at the end of each trading day, the price of ETFs price fluctuates with supply and demand during the regular stock market trading session. (For more on a comparison between ETFs and mutual funds, see Mutual Funds vs. ETFs: A Comparison.)

Origins of ETFs

ETFs were originally created to track various market indexes. The first ETF was the Index Participation Shares, introduced in 1989 and aimed to track the S&P 500. Toronto Index Participation Shares  (TIPS) was introduced in Canada in 1990 by the Toronto stock exchange to track an index of major Canadian companies TSE 35 and later TSE 100.

In 1993, the SPDR S&P 500, which tracks the S&P 500 Index, was launched. It trades under the symbol SPY. SPDR has since become a juggernaut among ETFs.

Growth of the ETF Market

The popularity and variety of ETFs available has grown tremendously over the past decade. According to the Investment Company Institute (ICI), the number of ETFs has grown from 102 in 2001 to 1,194 in 2012 with total net assets of more than $1.3 trillion.

Advantages of ETFs

  • Lower Costs: Annual management expenses of ETFs are typically substantially lower than those of mutual funds. ETFs are also free of "loads," the entry and exit fees that some mutual funds charge. It is often pointed out that many mutual funds fail to beat benchmark indexes such as the S&P 500. However, the fact that ETFs are now available to inexpensively and effectively track these indexes highlights their potential appeal to investors. Why pay high fees to enter a mutual fund that may fail to beat an index such as the S&P 500 when you can buy an ETF that efficiently tracks the benchmark index with a very low management fee?
  • Tax Efficiency: Due to low turnover and the way they are structured, ETFs are typically more tax efficient than comparable mutual funds.
  • Diversification: ETFs allow investors to invest in a broad array of markets that they may not otherwise have had access to. For example, prior to the advent of ETFs, investors would have needed access to trade the futures markets in order to trade commodities such as gold. The ability to easily allocate assets into a diverse range of markets empowers investors to better manage their risk against adverse moves in the market.
  • Versatility: ETFs are traded throughout the day in the same way as stocks, their prices fluctuating with supply and demand in the market. Investors can sell ETFs short and use all the various order types used with stocks to enter and exit the market. ETFs normally have the same commissions as stocks and can be traded on margin. Additionally, the barriers to entry are low, as an investor can purchase as little as one share of an ETF.
  • Transparency: Unlike mutual funds, the holdings of an indexed ETF are readily visible, either in their prospectus or on their website, so you can always know what you own. While mutual funds are only required to disclose their portfolios on a quarterly or semiannual basis, all "actively managed" ETFs must by law disclose their full portfolios every day. Active management refers to the use of a discretionary element, where management actively decides on which assets to include in a fund.
Top ETFs and What They Track: Global And Emerging Market ETFs

  1. Top ETFs and What They Track: Introduction to ETFs
  2. Top ETFs and What They Track: Global And Emerging Market ETFs
  3. Top ETFs and What They Track: Stock Index ETFs
  4. Top ETFs and What They Track: Volatility ETFs
  5. Top ETFs and What They Track: REIT ETFs
  6. Top ETFs and What They Track: Commodity ETFs
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Index ETF

    Exchange-traded funds that follow a specific benchmark index ...
  3. Russell 1000 Index

    An index of approximately 1,000 of the largest companies in the ...
  4. PowerShares

    A family of numerous domestic and international exchange-traded ...
  5. Intelligent ETF

    An exchange-traded fund (ETF) that employs an active investment ...
  6. Vanguard Exchange-Traded Funds

    A class of ETFs offered by Vanguard and traded like any other ...
RELATED FAQS
  1. How does a point change in a major index effect its equivalent exchange-traded fund?

    The S&P 500 and Dow Jones Industrial Index (DJIA) are two of the most well-known indexes tracking the movement of the ... Read Answer >>
  2. What is the difference between the QQQ ETF and other indexes?

    Find out more about the PowerShares QQQ Trust, the index the QQQ tracks, and the difference between QQQ, the SPY and Nasdaq ... Read Answer >>
  3. What are the most common ETFs that track the banking sector?

    Learn about common bank ETFs, and find out which ones focus on the international financial sector, big banks, regional banks ... Read Answer >>
  4. What's the difference between an index fund and an ETF?

    Learn about the difference between an index fund and an exchange-traded fund and how index fund investing compares to value ... Read Answer >>
  5. Why can you short sell an ETF but not an index fund?

    To answer this question, we should first define exactly what an index fund is. An index fund is a mutual fund, or a basket ... Read Answer >>
  6. Should I invest in ETFs or index funds?

    Learn advantages to investing in exchange-traded funds, or ETFs, and index funds, and decide whether to include them in your ... Read Answer >>
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center