The Individual Investor’s Guide to Exchange-Traded Funds 2013

The Individual Investor’s Guide To Exchange Traded Funds 2013 Splash image


The exchange-traded fund (ETF) industry marked its 20th anniversary this year.

The SPDR S&P 500 ETF (SPY) was incepted on January 22, 1993, after being conceived and championed by the late Nathan Most. According to Institutional Investor Magazine, Most came up with the idea while seeking new revenue opportunities for the American Stock Exchange (Amex). Using commodities as a basis, he thought of a product where a depository would hold blocks of securities and issue receipts for them, which in turn could be divided into many small pieces tradable on the exchange. (SPDR is an acronym for Standard & Poor’s depositary receipts.)

In this article


The genius of Most’s creation was that it allowed institutional investors a mechanism for hedging their portfolios, while offering individual investors an easy way of buying and selling shares in an index. This was an important point because, as Institutional Investor Magazine notes, the 1987 crash made the Securities and Exchange Commission (SEC) more receptive to proposals for what were then new hedging products. Nonetheless, it took Most six years to get approval from the Amex and then the SEC before the SPDR S&P 500 fund was launched.

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Expanded ETF Listings Spreadsheet
Field Definitions
All ETFs (PDF)
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From this small beginning has grown a very a large business. As of June 30, 2013, the exchange-traded fund industry, which includes both exchange-traded funds (ETFs) and exchange-traded notes (ETNs), had $1.44 trillion in assets under management (AUM). In addition, there are currently 1,479 ETFs and ETNs listed in the United States.

Business success brings competition, and competition makes it harder to be profitable. The ETF is a good example of this, where the biggest funds are getting bigger, partially due to both market performance and investors’ willingness to stay with them. The SPDR S&P 500 had $133.3 billion in assets under management as of June 30, 2013, compared to $103.7 billion a year prior. At the other end of the spectrum, Russell Investments liquidated 25 of its ETFs. The liquidated funds cumulatively had approximately $310 million in assets as of July 31, 2012. Since fund sponsors earn a percentage based on the amount of assets managed, low total assets make it harder to justify a fund’s continuance from a business perspective.

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Jason Zweig and Joe Light, of The Wall Street Journal, noticed another side effect of the ETF industry’s growth: a lack of new ideas. They based this observation both on the number and the type of funds launched this year. Just 70 exchange-traded funds launched during the first half of 2013, versus 126 during the first half of 2012, according to IndexUniverse. This year’s list of new funds includes a fund tracking the Nigerian market, a fund based on forensic accounting analysis and a fund designed to give leveraged exposure to the Brazilian market.

It's About the Index

The challenge many ETF sponsors are starting to face is deciding what else can be indexed and how an existing index can be reconfigured.

A passively managed exchange-traded fund tracks an index. Since the widely followed indexes already have existing funds, there is little demand for a new fund tracking the same index in the same manner. For example, iShares Core S&P 500 Index ETF (IVV), SPDR S&P 500 ETF (SPY) and Vanguard S&P 500 ETF (VOO) all track the S&P 500 index. The three funds combined have $185.5 billion in total assets. Add in the existing mutual funds that also track the large-cap index and it’s easy to see how an additional product designed to do the same thing would have limited appeal.

There are twists on how to track a particular index, but with a popular index, these options have largely been covered as well. In the case of the S&P 500, there are the Guggenheim S&P 500 Equal Weight ETF (RSP), the iShares S&P 500 Growth Index ETF (IVW), the iShares S&P 500 Value Index ETF (IVE) and the PowerShares S&P 500 Low Volatility ETF (SPLV). There is even the UBS E-TRACS S&P 500 Gold Hedged Index ETN (SPGH), which tracks the results of investing equal amounts in the large-cap index and gold futures. There are other S&P 500-tied ETFs besides what is mentioned here.

As the primary ideas have been incorporated into ETFs, a fund sponsor has to come up with a new idea to attract additional investment dollars. With a mutual fund, the fund’s objective can be tweaked or written broad enough to take advantage of current conditions and adjust to future conditions. An index, conversely, is designed to adhere to a specific strategy. This makes passive investments, including ETFs, more rigid from a portfolio management standpoint than actively managed funds. An adherence to the strategy is also required to show any results about how the index would have performed in the past if it had actually existed.

The quest for new ideas has led some ETF providers to create products with a limited appeal. This was exemplified last November when PureFunds launched its Diamond/Gemstone ETF (GEMS). The fund tracks global companies engaged in the gemstone industry. The narrow nature of the index is a big contributing factor to why the fund has less than $1 million in total assets, a very small number.

The lack of demand for new, unexploited passive ideas is a big contributing factor to why the overall number of ETFs is essentially unchanged from a year ago. All 1,479 ETFs and ETNs are covered in the expanded spreadsheet versus 1,475 in our 2012 ETF guide. The number of funds tracking passive indexes is barely changed as well: 1,161 this year versus 1,150 last year.

Competition Leading to Reduced Fees

Two years ago, we talked about the emergence of commission-free ETFs. This was a positive breakthrough for individual investors. An even more positive event has now emerged: lowered expenses. Since April 2012, Vanguard has reduced the annual expense ratios on 56 of its ETFs, including 41 during the 12-month period ended June 30, 2013.

BlackRock responded by introducing the iShares Core. These are specific ETFs within the iShares family with low expense ratios. Some of the funds within this group are renamed existing funds. The iShares Core S&P 500 ETF (IVV) and the iShares Core S&P Mid-Cap ETF (IJH) previously were named iShares S&P 500 Index and iShares S&P MidCap 400 Index. Though the names were tweaked, the expenses on the two funds were cut to 0.07% and 0.15% from 0.09% and 0.21%, respectively.

A week before we went to press, State Street Global Advisors (SSgA) joined in the fray. The company launched the SPDR Russell 2000 ETF (TWOK) in the small-cap stock category. The new ETF’s expense ratio of 0.18% is below the 0.23% charged by iShares Russell 2000 Index ETF (IWM) and the 0.21% charged by Vanguard Russell 2000 Index ETF (VTWO). The new fund’s launch date of July 9, 2013 was beyond the June 30, 2013, cut-off date for this guide; those who want to learn more about it should visit the SPDR website at

SSgA also renamed and lowered expense ratios on three funds: SPDR Russell 3000 ETF (THRK, formerly TMW), SPDR Russell 1000 ETF (ONEK, formerly ELR) and SPDR Russell Small Cap Completeness ETF (RSCO, formerly EMM). The new expense ratios of 0.11%, 0.10% and 0.16% compare to the previous expense ratios of 0.20%, 0.20% and 0.25%, respectively. The reductions come with a change in the indexes tracked. The new indexes for the three funds are Russell 3000 Index, the Russell 1000 Index and the Russell Small Cap Completeness Index. (We have incorporated only the name changes to these three funds. The SPDR Russell 3000 ETF appears in the print guide; data on the others is available in the downloadable spreadsheet at

The reduction in fees may seem minimal on an absolute basis, but they add up to a sizeable amount of savings over the long term. Every reduction of one basis point in an expense ratio equates to a savings of $10 annually for every $100,000 invested ($100,000 × 0.01% = $10). Over a period of five years, a five-basis point reduction in fees on a $100,000 investment would result in $250 in savings. The actual amount of savings realized would likely be higher due to the power of compounding.

Always consider fund expenses when determining what fund to invest in. A commission-free fund may save you $8 or $10 up front, but cost you more year after year because of a higher expense ratio. For a major index, there is often little reason not to opt for the lowest cost fund if you can make the change without incurring capital gains taxes.

The Largest Funds

This year we have added a new table showing the largest 15 funds (Table 1). The funds are ranked by total assets. Cumulatively, nearly $4 out of every $10 invested in ETFs (37%) is in one of these funds. The concentration increases as total assets rises. The five largest funds control more than $2 out of every $10 invested in ETFs (21%). Nearly $1 out of every $10 invested (9.2%) is controlled singularly by SPDR S&P 500 ETF.

Among the changes from last year, three bond funds lost their top 15 ranking: iShares Barclays TIPS Bond (TIP), iShares Barclays Aggregate Bond (AGG) and iShares iBoxx $ High Yield Corporate Bond (HYG). Yields jumped in the second quarter of this year, pushing down bond prices and causing outflows from bond funds. SPDR Gold Shares (GLD) incurred a $28.6 billion drop in its AUM. A sharp drop in gold prices led to devaluation of the fund’s underlying assets.

ETF Name (Ticker) Total Assets ($ Mil) Expense Ratio (%)
SPDR S&P 500 (SPY)
133,335.5 0.09
Vanguard FTSE Emerging Markets ETF (VWO)
49,355.4 0.18
iShares Core S&P 500 ETF (IVV)
42,573.2 0.07
iShares MSCI EAFE Index (EFA)
40,201.3 0.34
SPDR Gold Shares (GLD)
37,137.6 0.40
iShares MSCI Emerging Markets (EEM)
34,620.5 0.69
PowerShares QQQ (QQQ)
33,645.1 0.20
Vanguard Total Stock Market ETF (VTI)
30,798.1 0.05
iShares Russell 2000 Index (IWM)
21,098.8 0.23
iShares iBoxx $ Invest Grade Corp Bond (LQD)
19,509.3 0.15
iShares Russell 1000 Growth Index (IWF)
19,348.0 0.20
iShares Russell 1000 Value Index (IWD)
17,924.1 0.20
Vanguard REIT Index ETF (VNQ)
17,763.8 0.10
Vanguard Total Bond Market ETF (BND)
16,819.0 0.10
iShares Core S&P Mid-Cap ETF (IJH)


Source: Morningstar, Inc. Data as of June 30, 2013.

Five of the 15 largest funds lowered their expense ratios from last year, a sign of how the war on fees is playing out. Those funds are Vanguard FTSE Emerging Markets ETF (VWO), the renamed iShares Core S&P 500 ETF, Vanguard Total Stock Market ETF (VTI), iShares Russell 2000 Index (IWM) and the renamed iShares Core S&P Mid-Cap ETF. Only one of the largest 15 funds increased its expense ratio from last year, iShares MSCI Emerging Markets (EEM). The fund’s expense ratio rose from 0.67% to 0.69%.

How to Use This Guide

Exchange-traded funds have lowered the cost and increased the accessibility of investing in a wide variety of securities, including large-cap stocks, emerging market debt, precious metals, currencies and even agricultural commodities. However, more choice does not necessarily equate to higher returns. Therefore, investors should tread carefully.

Financial goals, diversification needs and risk tolerances should be the primary determinants when selecting an exchange-traded fund. Specifically, ask what asset classes and categories need to be included in your portfolio and then look for ETFs that match those requirements. Asset allocation ideas can be found in the Financial Planning section of Our Model Fund Portfolio provides an idea of how to build and manage a diversified portfolio using a mix of mutual funds and exchange-traded funds. (We believe investors should compare both types of funds and use the one that provides the best exposure to a specific asset class or investment strategy.) The Model Fund Portfolio is reviewed in the March, May, August and November AAII Journal issues; the latest commentary, in this issue, starts here. Monthly updates are available here.

Once asset class and category are determined, use this guide to find an appropriate exchange-traded fund. Most funds are named based on their underlying index (e.g., SPDR S&P 500 tracks the performance of the S&P 500 index). Understand that the construction of the underlying index will have a significant impact on the fund’s performance. For example, Exxon Mobil Corp. (XOM) has a far larger weighting in iShares Core S&P 500 Index ETF than it does in Guggenheim S&P 500 Equal Weight. The bigger the weighting, the greater the influence on an ETF’s performance. The column labeled “percent of portfolio in top 10 holdings” shows how much weight is allotted to a fund’s largest positions.

All ETF sponsors list current holdings and the weighting of those holdings on their websites. This information not only provides additional insight into how dependent a fund is on its top two or three holdings, but it can also help improve an investor’s portfolio diversification. Specifically, pay attention to whether a specific company accounts for a large position in two or more funds you are interested in. Expenses matter, and lower expenses are preferable. Expenses are influenced by the underlying securities; funds that use foreign securities, invest in commodities, or use aggressive long or short strategies carry higher expenses. Some brokers waive commissions on select ETFs, but the savings on the commissions need to be weighed against the annual expense ratio and the suitability of the ETF. In other words, selecting an exchange-traded fund solely because commissions are waived may actually turn out to be a more expensive decision.

Again, be sure to look at a list of the fund’s current holdings and read through the prospectus before buying any exchange-traded fund. A listing of ETF sponsor websites is included with the online edition of this guide.

Which Funds Were Included

The funds listed in the print version have at least $250 million in total assets, a $50 million increase from the minimum total assets used in last year’s guide. The rule was relaxed for funds held within the Model Fund Portfolio, which is why you will see Guggenheim S&P MidCap 400 Pure Value (RFV), Guggenheim S&P SmallCap 600 Pure Value (RZV) and iShares MSCI Frontier 100 (FM) in the guide.

This year, we instituted a requirement that funds be in existence for at least six months. Last year, the time requirement was dropped, but previously we had required funds be in existence for at least 12 months. The change was made to limit the number of funds included in the print version of this guide for space reasons, while still allowing newer funds with sizeable amounts of total assets to be included.

A comprehensive listing of ETFs and ETNs with performance data and additional information is available on at This expanded spreadsheet includes funds of all sizes and covers all 1,479 ETFs and ETNs.

Ultra and Contra ETFs

For members following aggressive trading strategies, ultra market (long) and contra stock market are two of the categories included in this guide. The ultra category includes funds that are designed to move in the same direction as their underlying index, but to experience two to three times the price movement. The contra categories (stock and bond) contain funds that are designed to move in the opposite direction as the underlying index. Some of these funds may experience inverse price movements that are two to three times greater than those of the underlying index.

Funds that move with a greater magnitude than the index they track use leverage. For every dollar invested, an investor has the potential to earn double or triple the return he would otherwise earn. At the same time, the magnitude of potential losses is two to three times greater. In other words, these are very risky investments.

In addition to the considerably higher level of volatility, these funds have a much greater potential for tracking error. Tracking error is the extent to which a fund’s actual return differs from the index’s return. It can result in actual returns being significantly different from what an investor anticipated based on the performance of an index. ProShares, one of the providers of ultra and contra funds, clearly warns investors not to hold such funds for longer than one day. Specifically, ProShares states, “Due to the compounding of daily returns, ProShares’ returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period.”

This warning applies to both ultra and contra funds. These ETFs are suitable only for speculative trading for the time period listed in the prospectus (typically a single day); they should not be used for a longer-term holding.

Investors concerned about market risk will be better served by maintaining proper diversification across asset classes, staying focused on long-term financial goals and conducting a thorough analysis of all investments.

A Key to Terms and Statistics

Most of the information shown in the listing is provided by Morningstar Inc., or calculated from the data they provided. Any data source has the potential for error, however. Before investing in any exchange-traded fund or exchange-traded note, you should read the prospectus, annual report and quarterly reports.

When a dash appears in an ETF listing, it indicates that the number was not available or does not apply in that particular instance. For example, the three-year annual return figure would not be available for funds that have been operating for less than three years. We did not compile bull and bear ratings for ETFs not operating during the entire bull or bear market period.

Return numbers that are in the top 25% of all funds within the investment category are shown in boldface. When the risk is in the lowest 25% for the category, this number is also bolded.

Figures given for the category averages are calculated based on the entire universe of ETFs.

The following provides an explanation of the terms we use in the ETF listings. The explanations are listed in the order in which the data and information appear in the listing.

Index Fund: The letter “I” before a fund’s name indicates that the fund is designed to mimic the performance of an index, such as the S&P 500; the amounts invested in each security are proportional to its representation in the index that the fund tracks. (Some funds may hold fewer securities than the actual index if they believe the same return characteristics can still be achieved.) The online version of this guide reports on the indexes tracked by these funds. In some cases, an index has been specifically created for the fund and may have different return characteristics than other indexes with similar names.

Enhanced: The letter “E” before a name indicates that the fund is designed to outperform its underlying index by improved security selection or following a strategy that reduces comparative volatility.

Exchanged-Traded Note (ETN): The letter “N” before a fund’s name indicates that the investment is an exchange-traded note. An ETN is a debt security designed to mimic the performance of an underlying index. The credit quality of the issuer needs to be considered when researching an ETN.

ETF Name: The exchange-traded funds are presented alphabetically by name within each category.

Ticker: The ticker symbol for each exchange-traded fund is given in parentheses for those investors who may want to access data online or through a touch-tone phone.

Total Return (%): Returns are based upon changes to a fund’s net asset value (NAV) or, where designated, share price (market return), assuming the reinvestment of all income and capital gains distributions (on the actual reinvestment date used by the fund) during the period. The return calculation is net of expenses. The year-to-date, 12-month, three-year and five-year returns are calculated through June 30, 2013. The three- and five-year returns are presented on an annualized basis. Returns that are in the top 25% of all ETFs within the investment category are shown in boldface.

Bull Market Return: Reflects the ETF’s net asset value performance in the most recent bull market, starting March 1, 2009, and continuing through June 30, 2013. Returns in the top 25% of all ETFs within the investment category are shown in boldface.

Bear Market Return: Reflects the ETF’s net asset value performance in the most recent bear market, from November 1, 2007, through February 28, 2009. Returns in the top 25% of all ETFs within the investment category are shown in boldface.

Yield (%): The total annual income distributed by the ETF divided by the period-ending net asset value. Calculated on a per share basis, this ratio is similar to a dividend yield and would be higher for income-oriented funds and lower for growth-oriented funds. The figure only reflects income; it is not a total return.

Tax-Cost Ratio (%): Measures how much an ETF’s annualized return is reduced by the taxes paid on distributions, assuming the maximum marginal tax rate. A tax-cost ratio of 0.0% indicates that the fund did not make any taxable distributions. If a fund had a 3.0% tax-cost ratio, it means that on average each year, investors lost 3.0% of their assets to taxes. The lower the ratio, the more tax-efficient the ETF. The ratio is calculated using the last three years of data.

Risk Index—Category and Total: The category risk index is the standard deviation of an ETF’s return divided by the standard deviation of return for the average ETF in the category. The total risk index is the standard deviation of an ETF’s return divided by the average standard deviation of return for all funds. Standard deviation is a measure of return volatility and is computed using monthly returns for the last three years. A risk index of 1.00 denotes average risk. Values above 1.00 indicate greater risk than average while values below 1.00 indicate less risk than average. Risk numbers that are in the lowest 25% of all funds within the investment category are shown in boldface.

Total Assets ($ Mil): Presented as millions of dollars, this is the amount of total assets an exchange-traded fund has under management. This is the total value of the fund’s portfolio. Size can be affected by the age of the fund, the index it follows and the number of competitive funds.

Average Daily Trading Volume (Thousands): Average daily volume of shares traded for the last three-month period through June 30, 2013.

Portfolio (%)—Stocks: The percentage of assets held in common stocks, both domestic and foreign. Bonds: The percentage of assets held in debt securities that are not convertible into common stock. Other securities: The percentage of assets held in futures, options, preferred stock, trusts or other alternative securities. Cash: The percentage of assets held in cash or cash equivalents.

Percent of Portfolio in Foreign Issues: The percentage of the ETF’s assets that are invested in foreign stocks and foreign bonds.

Portfolio Turnover Ratio (%): A measure of the trading activity of the ETF, which is computed by dividing the lesser of purchases or sales for the year by the monthly average value of the securities owned by the fund during the year. Securities with maturities of less than one year are excluded from the calculation. The result is expressed as a percentage, with 100% implying a complete turnover within one year.

Number of Holdings: The total number of individual securities held by the ETF. These can include stocks, bonds, currencies, futures contracts and option contracts. This figure is meant to be a measure of portfolio risk: The lower the number, the more concentrated the fund is in a few issues. Some ETFs may hold fewer shares than the index’s name would suggest if the ETF’s manager believes he can mimic the returns of the index without holding all of the securities that comprise it.

Percent of Portfolio in Top 10 Holdings: Investments, expressed as a percentage of the total portfolio assets, in the ETF’s top 10 portfolio holdings. The higher the percentage, the more concentrated the fund is in a few companies or issues, and the more the fund is susceptible to market fluctuations in those few holdings. Used in combination with the number of holdings, this figure can indicate how concentrated an ETF is.

Expense Ratio (%): The sum of administrative fees and adviser management fees divided by the average net asset value of the ETF, stated as a percentage. Brokerage costs incurred by the fund are not included in the expense ratio, neither are the commissions you may pay to buy and sell shares.

More on ETFs

ETFs and ETNs: Knowing What You Own

Active Funds and Other Changes in the ETF Industry

Using ETFs in a Tough, Sideways-to-Bear Market

Building & Managing Your Portfolio

How to Safely Navigate Through Crowded ETF Waters

The EZ Approach to ETF Portfolio Building

Nine Timeless Rules for Investing in Mutual Funds (and ETFs)

Trolling for More Data

Websites for Exchange-Traded Funds


Choosing an ETF: Pointers to Keep in Mind

Tom Lydon of ETF Trends offers these tips for investors when investigating an ETF for purchase:

  • Understand what the underlying index represents: 99% of ETFs follow an index, and holdings and percentage of holdings are very transparent.
  • Understand the ETF’s structure: Some ETFs are securities-based where others—such as commodities and currencies—represent futures or physically backed holdings.
  • Know the costs: Some ETFs have expense ratios as low as eight basis points, others can be 90 or 100 basis points. With more creative ETFs coming to market, don’t assume all ETFs are cost effective.
  • Understand liquidity: ETFs trade like stocks and have bid/ask spreads. Tracking volume and the spread is easy but requires monitoring.


ETF & ETN Contact Information

Fund Family Name Web Address
Barclays Funds
Credit Suisse AG
Deutsche Bank
Direxion Funds
Emerging Global Advisors
Exchange Traded Concepts
Factor Capital Management
Fidelity Investments
First Trust
Flexshares Trust
Global X Funds
Goldman Sachs
Guggenheim Investments
Highland Funds
Huntington Strategy Shares
International Securities Exchange
Market Vectors
Morgan Stanley
Pax World
Precidian Funds LLC
Royal Bank of Scotland NV
Schwab ETFs
SPDR (State Street Global Advisors)


Arnold Chong from IA posted over 3 years ago:

Written well for average investor to understand world of ETF.

Don Anderson from CA posted over 3 years ago:

Incepted???? (In very first paragraph of article.) Presume the author means introduced, not ingested. Where are the editors when you need them!

Greg Mckelvey from GA posted over 3 years ago:

The (downloadable) expanded ETF listing provides very useful information for researching and selecting ETFs for investment. In addition to being sortable and searchable, the categorization is also helpful. However, the information is a wasting asset, which for me, would not be a reliable resource very long, certainly no longer than a calendar quarter. I would urge you to offer regular updates at least quarterly, and even more frequently if resources permit.

It is information that any AAII member that uses ETFs in their investment portfolio can benefit from, and it becomes more valuable when the information remains more current.


Anthony DeMaria from GA posted over 3 years ago:

Good article but - - - -

How can (which provides very good info to a free subscriber) be used in evaluating ETF's.

AAII officials as well as members please provide assessments and what we should use/do.

Thanks AA DeMaria cumming GA

Charles Rotblut from IL posted over 3 years ago:

Hi Anthony,

I'm not familiar with the website you mentioned, but I looked briefly at it. There are various websites touting strategies and showing results designed to make their performance look good. This does not mean the strategies work in a real world environment or will work in the future.

I can't speak to how ETFreplay's strategies will or will not work. I can tell you that any strategy that requires more trading will result in higher tax and transaction costs. It will also require more attention on your part.


Alfred Hess from NC posted over 2 years ago:

Any chance that AAII will give the same type of detail to the performance of ETFs as it does to MFs? Such as the 50 top performing ETFs of 2013, etc. with details of the past 4 years as well at the average performance for the past 3, 5 and 10 year? Thanks

Charles Rotblut from IL posted over 2 years ago:


The expanded listings spreadsheet contains up to 10 years of data, but most ETFs are far younger than that. Many foreign and sector funds weren't even five years old at the time we put together last year's guide.


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