Investors added $249.4 billion to exchange-traded funds (ETFs) during the first half of 2017, not far from the $287.5 billion added during full-year 2016.

As of the end of June, total assets under management (AUM) for U.S.-listed ETFs was only slightly under $3 trillion, up 30% from 12 months ago. The market has been significantly growing; at year-end 2003, ETFs had $151 billion in AUM, and only 119 ETFs existed. (We include ETNs and other exchange-traded products in the umbrella term ETFs in this article, unless specifically stated otherwise.)

While ETF assets under management are growing at a significant clip, the ETF market remains only one fifth the size of the mutual fund market. According to the Investment Company Institute (ICI), at the end of May, mutual funds had $14.7 trillion in AUM. Despite the ETF market being overall smaller, the net inflow of $249.4 billion during the first half of the year outpaced net new inflows into mutual funds, which totaled $81.1 billion in the first half of 2017. The strong growth of the ETF market has been attributed to investors’ desire to move more money into passively managed assets, a greater focus on lower-fee funds and the ease of buying and selling that these funds offer.

Table 1 shows the current list of the 15 largest ETFs measured by assets under management, along with their expense ratios.

Enhancements to ETF Tables Online

As part of this year’s guide we’re unveiling an enhanced online ETF Guide. The online guide covers 2,042 funds, including data on the 507 ETFs presented in this print version. For those of you who tried out the new online interactive tables for the 2017 Mutual Fund Guide, you will recognize the formatting.

The new tables are not only easier to read than before, they are sortable. Members can sort by return, yield, tax-cost ratio or other data of their choosing. Each ETF in the online guide also has its own summary page that can be reached by clicking on a particular ETF’s ticker symbol. The fund-specific summary page allows members to look at additional information on each fund, including more detailed historical performance figures and a more detailed portfolio allocation breakdown.

The “market return differential” over various time periods has been added to provide additional insight. Market return differential measures the percentage difference between an ETF’s market return (price return) and its net asset value (NAV). The calculation is:

(Market Return – NAV) ÷ NAV

Market return differential measures the return the individual investor is receiving (market return) versus an ETF’s net asset value. A positive (negative) market return differential implies that investors realized a return on the ETF greater (less) than the return of the fund’s underlying assets. Relatively larger differentials in either direction can suggest that the underlying assets are not as easily tradeable, which can greatly increase risk.

Table 1. The 15 Largest ETFs

ETF Name (Ticker)	Total Assets ($ Mil)	Expense Ratio (%)
SPDR S&P 500 ETF (SPY)	236,738	0.09
iShares Core S&P 500        (IVV)	115,463	0.04
Vanguard Total Stock Market ETF (VTI)	79,832	0.04
iShares MSCI EAFE ETF (EFA)	76,500	0.33
Vanguard S&P 500 ETF (VOO)	70,139	0.04
Vanguard FTSE Emerging Markets ETF (VWO)	55,647	0.14
Vanguard FTSE Developed Markets ETF (VEA)	55,615	0.07
PowerShares QQQ ETF (NDQ)	49,564	0.20
iShares Core US Aggregate Bond ETF (AGG)	47,418	0.05
iShares Core S&P Mid-Cap ETF (IJH)	40,038	0.07
iShares Russell 2000 ETF (IWM)	37,747	0.20
iShares Russell 1000 Value ETF (IWD)	36,760	0.20
iShares iBoxx $ Invmt Gr Corp Bd ETF (LQD)	35,981	0.15
iShares Russell 1000 Growth ETF (IWF)	35,381	0.20
Vanguard Total Bond Market ETF (BND)	34,553	0.05
Source: Morningstar, Inc. Data as of June 30, 2017.

New in This Year’s Guide

This year’s print guide contains a record 507 funds. The online version of this guide contains a comprehensive spreadsheet of all 2,042 ETFs listed on the U.S. exchanges. (Last year, there were 1,927 U.S.-listed ETFs and ETNs in existence.)

There are two category changes from last year: The micro-cap stock category was merged into the small-cap stock category, and the homebuilders category was merged into the real estate category. Two of the remaining 54 categories do not appear in print because of the size restriction for our print version; no ETFs had over $450 million in assets in the contra commodities and foreign contra stock categories.

How to Use This Guide

Exchange-traded funds provide a low-cost and accessible way 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, decide 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 AAII.com. 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. Monthly updates are available at AAII.com and via the free monthly AAII Model Portfolios Update email (sign up at www.aaii.com/email).

Once a desired asset class and category are determined, use this guide to help find an appropriate exchange-traded fund. Most funds are named based on their underlying index [e.g., SPDR S&P 500 ETF (SPY) 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, a large company such as Apple Inc. (AAPL) has a far larger weighting in the iShares Core S&P 500 Index ETF (IVV), which weights stocks by capitalization, than it does in Guggenheim S&P 500 Equal Weight ETF (RSP). The bigger the weighting, the greater the influence on an ETF’s performance. The column in the guide 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. Pay particular 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 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 or otherwise incorrect 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 guide largely have at least $450 million in total assets. PowerShares Russell 1000 Equal Weight (EQAL) is listed in this guide due to its inclusion in AAII chairman James Cloonan’s Level3 Passive Portfolio. Read Jim’s book, “Investing at Level3” (www.level3investing.com) to learn more about the rationale for allocating to this fund.

Funds included in the guide also must have been in existence for at least a year. The time requirement is used in the print version of this guide for space reasons, while still allowing newer funds with sizeable amounts of total assets to be included.

As mentioned, comprehensive listings of ETFs and ETNs with performance data and additional information are available on AAII.com at www.aaii.com/etf-guide. The expanded and interactive online tables and downloadable spreadsheet include funds of all sizes and cover all 2,042 ETFs and ETNs.

Ultra and Contra ETFs

For members following aggressive trading strategies, ultra market (long) and contra 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 experience two to three times the price movement. The contra categories (stock, bond and commodity) contain funds that are designed to move in the opposite direction as the underlying index, with inverse price movement up to three times greater.

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 or she 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 net asset value (NAV) return differs from the underlying index’s return. Leveraged ETFs are more prone to tracking error because of the manner in which their returns are compounded. The compounding process results in a reduction of realized leverage the longer an investor holds such funds, and most leveraged ETFs are designed to be held for only one day. Those desiring more information about how the performance of these funds is affected over time should read “Leveraged ETFs: Multiplying by the Unknown” by William J. Trainor Jr. in the July 2017 AAII Journal.

When the market direction favors a leveraged ETF—an upward-trending market for ultra ETFs and a downward-trending market for inverse ETFs—the returns can be appealing; however, it is extremely important to realize that leveraged funds can destroy wealth as quickly as they create it.

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 is provided by Morningstar Inc. or is calculated from the data the company 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 averages may be skewed by ETFs only included in the online version of this guide.

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

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.

Structure: The letters “OE” indicate that the ETF is an open-ended investment company. “OE” includes exchange-traded funds, exchange-traded managed funds (ETMFs) and mirror open-ended funds as they report NAV returns.

The letters “DU” stand for uncollateralized debt instrument, which is an exchange-traded note. As a debt security, ETNs do not generate the return of their index via underlying securities, but the ETN issuer guarantees the holder the return of the underlying index (minus expenses).

The letters “UIT” stand for unit investment trust. A unit investment trust is a registered investment company that buys and holds a generally fixed portfolio of stocks, bonds, or other securities. “Units” in the trust are sold to investors (unitholders) who receive a share of principal and dividends (or interest). A UIT has a stated date for termination that varies according to the investments held in its portfolio.

The letter “P” stands for partnership. ETFs as partnerships are a commodity pool structure and track oil, commodities or currencies.

The letters “GT” stand for grantor trust. Indicated in the taxation portion of the prospectus, the trust will consist of a set “basket” and they have fixed portfolios. 

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, 2017. 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 total return in the most recent bull market, starting March 1, 2009, and continuing through June 30, 2017. 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 total return 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 2.0% tax-cost ratio, it means that on average each year, investors lost 2.0% 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 (AUM). 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, 2017.

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: 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 in 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

The Four Groups of ETFs

Why Aren’t There More Active ETFs?

Leveraged ETFs: Multiplying by the Unknown

An Inside Look at Exchange-Traded Funds

ETFs and ETNs: Knowing What You Own

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

Building & Managing Your Portfolio

Tracking the S&P 500 With Mutual Funds and ETFs

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)

Further Research on ETFs

Visit Computerized Investing’s “Best of the Web” sections on ETFs:

Best Sites for Mutual Fund & ETF Data

Best Sites for Mutual Fund & ETF Ratings & Recommendations

Best Sites for Mutual Fund & ETF Screeners