The ETF industry has come a long way from the time when the ETFs were first launched as investment tools to gain exposure to different asset classes. Since then, many ETFs came into existence, of which many could not survive in the industry and had to be shut down. So what could be the possible reason behind those ETFs which were launched only to be shut down later?
We can say that ETFs are more about numbers like AUM, volume, number of holdings, etc. So, which one of these numbers keeps an ETF going? Is it asset under management which indicates whether the fund will continue to exist or its average daily volume? (Ten Biggest U.S. Equity Market ETFs)
Undoubtedly volume is an important consideration in the investment process, especially for traders who get in and out of a particular security very frequently. For these traders, high volume levels can help keep bid-ask spreads low and thus reduce the total cost of trading. (Guide to the 25 Most Liquid ETFs)
But it should be noted that a fund’s very existence depends to a large extent on its asset under management. Generally, for a fund asset under management of or over $100 million work as a threshold for any sponsor’s profitability. While big fund houses may be able to run their ETFs with low AUM for years, it becomes really difficult for small fund house.
Although AUM and volume both play crucial roles in any fund’s existence, it is finally the return from the fund which influences any investor’s decision. Still, the funds that have managed to attract a large amount of assets indicate that they are popular with the investors due to their past performance and expectations for future performance. Investors looking to invest in ETFs with very high AUMs (more than 30 billion) as criteria have the following options available.
SPDR S&P 500 (SPY)
Initiated in January 1993, SPY is the king in the ETF world, with the highest asset under management. It manages an asset base of $118.4 billion. The most popular fund among investors, SPY seeks to invest its heavy asset base in a basket of 500 stocks and trades with an average trading volume of about 135 million shares. The fund also has an edge in expenses as it charges a fee of just 0.09% annually. (Guide to the 25 Cheapest ETFs)
The weighting towards the top 10 holdings is also moderate as just 21.4% of the huge asset base goes towards them. This implies that the fund’s asset allocation is not limited to the top 10 holdings but is spread out among other companies as well. Apple Inc. (AAPL) takes the top position in the top 10 holdings list with an asset allocation of 4.9%. Among others, the fund does not invest more than 3.3% in any one holding.
Among sector allocation, the fund gives double-digit allocation to the top 5 sectors with information technology being the most preferred sector in the list with an asset allocation of 20.1%.
Vanguard MSCI Emerging Markets ETF (VWO - ETF report)
This Vanguard ETF looks to tap the growing emerging markets which not only have greater growth potential but also lower correlation with their developed market counterparts. (Three Overlooked Emerging Market ETFs)
This ETF tracks the MSCI Emerging Markets Index in order to provide exposure to a basket of stocks across various developing nations. The product has proven to be extremely popular with investors.
The proof is in the $67.1 billion under management in the fund, while trading volume is more than 18 million shares a day. Also, the cost appears to be minimal at 20 basis points, especially when compared to other emerging market ETFs.
In terms of a portfolio, VWO provides access to 902 securities in its basket and does not allocate more than 3.9% to any one stock. This suggests that the product is well diversified from an individual security perspective and is unlikely to face company specific risk. (Three Emerging Market ETFs to Limit BRIC Exposure)
With regard to country exposure, China takes the top spot at 17.3% of assets, followed by 14.4% in Korea, 15.2% in Brazil, and a 10.7% allocation to Taiwan.
SPDR Gold Shares (GLD)
For a bullion-backed approach to gold ETF investing, investors can look to SPDR Gold Shares. GLD is the ETF which is backed by physical metal and holds the metal in the form of bullion or ingots.
Investing through GLD in gold represents a cost-effective and suitable mode for investors. It is expected that the transaction costs for buying and selling the shares will be lower than purchasing, storing and insuring physical gold for most investors (Has The Junior Gold Mining ETF Lost Its Luster?).
This ETF is designed to track the spot price of Gold bullion. GLD is an ETF rich in AUM as it has $75.9 billion asset under management and is one of the most liquid options available in gold ETF investing trading with volumes of 7 million a day. The fund charges a fee of 40 basis points annually.
iShares MSCI EAFE Index Fund ETF (EFA)
For investors seeking a broad exposure to developed markets around the world outside of the U.S. and Canada should invest in EFA. EFA tracks the MSCI EAFE Index and provides exposure to companies specifically in Europe, Australia, and the Far East (Seven Biggest International Equity ETFs).
This product manages an asset base of $36.7 billion and is an extremely liquid option available to investors as traded volume on a normal day is more than 14 million. So this product is rich in both AUM and volume.
The fund seeks to invest this asset base in a large basket of 926 stocks and is immune to company specific risk with just 13.4% of assets in the top 10 holdings. Among sector breakdown, the fund is a bit tilted towards financials in which it put in 23.4% of the asset base. Among others the fund does not invest more than 12.3% in any stock.
From a country perspective, United Kingdom takes the top spot at 22.8% of assets, just edging out Japan. The fund charges an expense ratio of 34 basis points on an annual basis.
MSCI Emerging Markets Index Fund (EEM)
For a broad play on the emerging market space, EEM presents a compelling choice to the investors looking to tap the emerging markets (Get True Emerging Market Exposure With These Three ETFs).
The fund managed to build an impressive asset base of $37.4 billion and is also rich in volume trading with volumes of more than 36 million on a normal day. The ETF charges investors 67 basis points in fees for its services. .
It represents a solid pick for long-term investors as it has a well diversified portfolio that doesn’t put more than 3.8% in any one security. Sector exposure, however, is tilted towards financials, information technology, energy and materials where each of them accounts for double-digit allocation.
For countries, China takes the top spot at just about 17% of the total, followed by a 15% allocation to South Korea and a 13% holding in Brazilian firms.
iShares Core S&P 500 ETF (IVV)
Investors seeking for exposure in the large capitalization sector of the U.S. equity market or S&P 500 should look to invest in IVV. IVV trades with an asset base of $32.8 billion.
This produces a product which is home to a large basket of 502 large cap stocks with a spread out holding pattern as it just allocates 21.3% to the top 10 holdings. Apple takes the top spot in the top 10 holdings closely followed by Exxon Mobil and General Electric.
The fund does not appear to be biased towards any particular sector and gives double-digit allocation to almost all the sectors except the last four. The fund also has an edge in expenses as it just charges 9 basis points annually.
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