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. Eventually, there will be less difference between the returns of one colossal fund and the next. When growing ETFs end up holding comparably sized portions of popular companies there is less opportunity for the investor to enjoy returns that beat the market. Still, a large exchange-traded fund means reduced risk, which is part of what most ETF investors are hoping for, anyway.
Largest ETF in Existence, the SPY
The largest ETF in existence was built for the express purpose of tracking an index. The (SPY) from State Street Global Advisors was created in 1993, making SPY the oldest ETF in the United States. As its name indicates, the fund 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.
Second Largest ETF—VWO
The second-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 sponsor of a UK compiler of indices and sort of an Old World version of Standard & Poor’s.
“Emerging Markets” is the universally accepted phrase to indicate economically developing nations whose economies show glints of brilliance outnumbered by wide stretches of poverty. The Vanguard FTSE Emerging Markets ETF consists of the stock of 955 companies—largely Chinese and Taiwanese. These companies are 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 | 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.
IVV—Third Largest ETF
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. Lower expense 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. The fund issues dividends at fixed quarterly dates. 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. This makes for a difference of a few basis points in favor of the iShares Core ETF when markets are rising andSPDR when they’re falling. The difference is microscopic for the ordinary investor, less so for the institutional investor with millions on the line.
Fourth Largest ETF—EFA
hom*ogeneity 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. Some investors might view Canada and the U.S. as being a pair of countries consisting of a superpower—with an increasingly intervening executive branch—and its neighbor, who, as the proverb goes, sneezes when the superpower catches a cold. Thus, the MSCI EAFE ETF consists primarily of the following:
Nestlé | Food | |
Roche | Switzerland | Drugs |
Novartis | Switzerland | Drugs |
HSBC (Hong Kong &Shanghai Banking Corporation) | United Kingdom | Bank |
Toyota | 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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