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The ETF world has gained immense popularity in recent years, finally surging through the important $1 trillion mark for assets under management. While part of the interest has undoubtedly been due to a variety of new strategies that have been debuted in the space, investors continue to flow into well-known products targeting popular market segments.
This has become the ideal approach for many investors as equity ETFs often cost investors less in fees and allow for greater flexibility in terms of trading and tax liabilities. Additionally, ETFs provide investors greater transparency than mutual funds while the basket approach helps to cut down on risk and volatility when compared to single stock investments (read: ETFs vs. Mutual Funds).
In this article, we take a look at ten of the biggest, and thus most popular, U.S.-focused ETFs investors currently have at their disposal. There are literally hundreds of funds in this segment but these have stood out as popular vehicles for those looking to achieve broad exposure to a slice of the American stock market.
While these ETFs might not necessarily be the best choices in their respective markets, one has to certainly recognize their extreme popularity and the likely possibility that these products will be around for the long haul. Furthermore, gigantic products like those on this list can often achieve economies of scale which can translate into lower costs for investors, both in terms of bid ask spreads and expense ratios.
Thanks to this reality, investors who are new to the world of ETFs but seeking to make an initial allocation could be well served by looking at any of the following 10 massive U.S-focused ETFs listed below:
SPDR S&P 500 ETF (SPY)
The largest and the oldest ETF is SPY issued by State Street, a fund that falls under the large cap blend category. With total assets of $98.3 billion, the fund is far and away the biggest ETF listed in the U.S., beating out the next biggest fund by $30 billion.
SPY tracks the S&P 500 Index, which is a free-float capitalization-weighted benchmark that focuses on 500 of the largest companies that are based and listed on American exchanges. In order to accomplish this task, the ETF uses a full replication technique, holding each and every stock in the underlying index (read: Five ETFs to Buy in 2012).
The fund puts only 20.45% of its assets in top ten holdings, which includes Apple (AAPL), Exxon Mobil (XOM), Microsoft (MSFT), and General Electric (GE). Technology and financials constitute the top spots in the basket while giant and large cap stocks dominate from a market capitalization perspective.
The product is a low-cost choice in the space with a minimal bid-ask spread, low tracking error and a small fee of nine basis points a year. Trading in good volumes, SPY has generated annual returns of 1.86% and 12.20% in fiscal 2011 and year-to-date, respectively, and yields 1.44% dividend per annum. (Read: Three ETFs To Play The Tech IPO Boom)
PowerShares QQQ (QQQ)
The fund is passively managed ETF designed to deliver the return of the US large-cap growth stocks. It seeks to match the price and performance of the NASDAQ-100 index, which includes the largest domestic and international nonfinancial companies based on market capitalization.
The stocks in the NASDAQ-100 index are considered to be the growth stocks because they have higher price-to-book ratios and higher forecasted growth rates. The ETF seeks a full replication strategy, holding all the 100 stocks in NASDAQ-100 index.
Launched in March 1999 and with total assets of $33.2 billion, the fund is heavily concentrated in the information technology sector as these companies constitute all seven of the top ten holdings in the ETF. Additionally, investors should note that the fund has more than 94% correlation with the broader U.S. market and nearly 98% with developed markets.
The product delivered annual return of 3.46% last year and 22.45% year-to-date. It is the low-cost choice in the space with lower fees of 20 bps, small bid/ask spread and good tracking error. Further, the ETF yields 0.74% dividend on yearly basis which is decent for a high growth, broad market play.
iShares S&P 500 Index Fund (IVV)
Launched in May 2000, the fund is a passively managed ETF designed to deliver the return of the US large-cap stocks. With total assets of $29.1 billion, IVV seeks to match the performance and yield of the S&P 500 Index before fees and expenses. The S&P 500 Index is a free-float capitalization-weighted index selected from the wide range of industries for market size, liquidity and industry grouping.
The ETF uses full replication technique, holding 500 stocks in S&P 500 Index. The fund is one of the largest, most traded and well known large cap ETFs on the market today. Much like its counterpart SPY, this product is inexpensive, has a low bid ask spread and has a very small tracking error.
The product is least concentrated in top 10 companies with 20.50% of assets. Information technology and financial take the top spots in the basket. Unlike other large-cap blend ETFs, IVV has generated good returns of 2.03% last year and excellent returns of 12.99% year-to-date. The product also yielded decent dividends of 1.84% per annum. (Read: Three Financial ETFs Outperforming XLF)
Total Stock Market ETF (VTI)
For the broad diversification across all equity classes, investors should consider Vanguard’s VTI. This fund seeks to replicate the price and yield of the MSCI US Broad Market Index before fees and expenses, holding 3,380 stocks. The fund portfolio is comprised of the entire U.S. stock market, ranging from micro caps to giant firms. It puts a decent amount of assets in the top ten (15%) considering the enormous basket of holdings at its disposal.
With total assets of $21.0 billion, the fund is one of the largest and most heavily traded, as well as inexpensive compared to the other ETFs in the space with low tracking error and small bid-ask spread (see more on ETFs at the Zacks ETF Center).
The fund uses a passive index strategy and charges only seven bps per year in fees from investors. The product has generated higher returns of 13.81% year-to-date and minimal returns of 0.93% last year, however, the yield is decent, coming in at 1.74% per annum.
Russell 1000 Growth (IWF)
This fund, issued by iShares, is a passively managed ETF designed to deliver the return of the US large-cap growth stock market. The product tracks the performance of the Russell 1000 Growth index, before fees and expenses.
The Russell 1000 Growth index is capitalization weighted 590 stock subset of Russell 1000 index. The stocks are considered to be the growth stocks because they have higher price-to-book ratios and higher forecast growth rates than their peers in the benchmark.
The fund has a decent concentration ratio, although 29% of its assets do go to the top ten holdings, including Apple, Exxon Mobil, and IBM. Technology, consumer discretionary, and producers durables constitute the top positions in the basket.
With total assets of $15.9 billion and expense ratio of 0.20%, the fund delivered 2.47% and 15.18% returns, respectively, in 2011 and 2012 year-to-date. The product yields dividend of 0.93% per annum.
iShares Russell 2000 Index Fund (IWM)
Investors seeking small cap exposure can look to IWM, a popular small cap ETF debuted by iShares in May 2000. This fund is the largest in the small cap equity space with total assets of $14.7 billion tracking the performance of the Russell 2000 Index.
The Russell 2000 Index is a capitalization weighted 200 stocks subset of the Russell 3000 Index. IWM uses a full replication strategy holding all 1,968 stocks in the underlying index while putting only 2.53% of its assets in the top 10 firms. However, the product is heavy on financial and consumer discretionary. (Read: India Small Cap ETFs Head-To-Head)
The fund charges low fees of 26 bps a year and is highly traded and liquid. The fund is performing excellent starting this year as depicted by the 11.11% annual returns year-to-date. However, the returns were not good last year due to the slump in the market. Additionally, the ETF yields an annual dividend of 1.03%, which isn’t too bad considering the growth focus of the fund.
iShares Russell 1000 Value Index Fund (IWD)
Another biggest fund available for the large cap exposure in the ETF space is iShares IWD. The fund seeks to match the performance and yield of the Russell 1000 Value Index, which is a capitalization weighted 657 stock subset of the Russell 1000 Index. The group focuses on value stocks which look to have lower PE ratios and lower values for price to book and price to sales ratios.
The ETF is heavily weighted to financials as this takes up the top spot in its basket. Health care and energy firms also receive large allocations, although energy firms do receive a double digit allocation as well.
From an individual holdings perspective, General Electric is the top firm closely followed by fellow large caps Chevron, AT&T, and JPMorgan Chase. In total, however, the fund holds 655 securities and puts less than 25% of its assets in the top 10 (Read: Forget Big Pharma, It Is Time For A Biotech ETF).
IWD is one of the cheaper and more liquid options in the category and it has delivered average returns of 0.21% in 2011 and 10.59% year-to-date. The fund does have a solid yield of 2.2% while the total assets under management is quite robust at $11.88 billion.
SPDR Dow Jones Industrial Average ETF (DIA)
Risk adverse investors seeking to invest in blue chip companies may consider State Street’s DIA. This fund seeks to replicate the price and yield performance of 30 blue-chip U.S. companies as indicated by the Dow Jones Industrial Average. The fund holds 30 stocks with 57% of its assets concentrated in the top 10 companies.
The top three blue chip stocks include International Business Machines, Chevron and Caterpillar. From a sector perspective, industrial and technology weighs heavily on the fund’s assets with 21% and 18%, respectively. (Read: Three Industrial ETFs For A Manufacturing Revival)
Launched in January 1998, the fund generates descent returns of 8.07% in 2011 and 8.20% year-to-date with impressive dividend yield of 1.86%. The product is another relatively low-cost choice in the space with only 18 bps of fees per year. Additionally, it trades with a good volume, has a low tracking error and a small bid/ask ratio, thanks to its AUM of nearly $11.2 billion.
Dividend Appreciation ETF (VIG)
This fund is appropriate for the income-hungry investors with AUM of $10.87 billion. The fund uses a passive index approach and a full replication strategy, holding 128 stocks that are in the Dividend Achievers Select Index. The fund represents the stocks of companies having a record of growing dividends each year. The fund focuses on quality dividend payers rather than those that pay high yields.
ConocoPhillips, Chevron, Coca-Cola and Exxon Mobil make up the top positions in the basket. From a sector perspective, the fund is highly exposed to consumer staples and industrials, which makes up a combined 50% of assets in the basket. (Read: Top Three Emerging Market Consumer ETFs)
Initiated in April 2006 by Vanguard, the fund has delivered annual returns of 7.86% year-to-date and annual dividend yield of 1.99%. Trading with good volumes, the product has low expense ratio of 0.24% compared to the category average of 0.36%.
S&P MidCap 400 Index Fund (IJH)
Investors seeking mid-cap exposure can look to iShares and their IJH, a product that was launched in May 2000. This fund is the largest mid-cap blend fund with total assets of $10.2 billion under management. The fund seeks to replicate the price and performance of the S&P MidCap 400 Index, before fees and expenses, holding 403 stocks.
The fund is quite well spread out as it puts less than 7% of its assets in the top ten holdings. However, the product is heavy on industrials and technology, which together make up 34% of assets.
Traded in good volumes, the ETF is highly volatile and is the low cost choice for the investors due to its lower expense ratio of 0.20%. The fund generates negative return of 1.89% last year and attractive 14.15% return year-to-date. It also yields annual dividends of 1.12%.
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