Exchange-traded funds (ETFs) were launched in 1993 with the first U.S. fund, Standard & Poor's Depositary Receipts, better known as spiders (SPDRs). This first ETF tracked the S&P 500 and its popularity with investors led to the introduction of ETFs based on other indexes, such as the Dow Jones Industrial Average and the Nasdaq 100.
Key Takeaways
- Exchange-traded funds (ETFs) were launched in 1993.
- Investing in ETFs can be a low-cost strategy to build an optimal portfolio.
- Several tools help investors find the right ETFs based on cost, asset class, or index.
Investing in ETFs
As of Nov. 2023, over 3,000 ETFs were listed on U.S. exchanges with combined assets exceeding $7.6 trillion. ETFs range from traditional index ETFs based on U.S. and international equity indexes and subindexes, and others that track benchmark indices in bonds, commodities, and futures.
There are ETFs based on investing style and those that focus on market capitalization. Leveraged ETFs provide returns or losses based on the underlying index's movements, as well as inverse ETFs that rise when the market falls and vice-versa.
Investors can narrow their choices using an asset screener typically available on brokerage trading platforms for free or through subscription-based services.
ETF Examples
Funds that track the S&P 500 index include SPDR (SPY), Vanguard S&P 500 ETF, or iShares S&P 500 ETF. Some ETF issuers have developed products with a specific focus. The Range Cancer Therapeutics ETF (CNCR) tracks the Range Cancer Therapeutics Index and invests in stocks that focus on the research and development of drugs and technology to fightcancer using immunotherapy.
ETFs based on new investment trends include the Robotics & Artificial Intelligence ETF (BOTZ) or the Drone Economy Strategy ETF (IFLY). The Obesity ETF invests in companies developing ways to fight obesity and related diseases.
In Jan. 2024, the Securities and Exchange Commission (SEC) approved eleven new spot bitcoin ETFs listed on the NYSE Arca, Cboe BZX, and Nasdaq exchanges.
How to Choose an ETF
Given the number of ETF choices that investors have, it's important to consider the following factors:
- Level of Assets: An ETF should have a minimum level of assets, with a common threshold being at least $10 million. An ETF with assets below this threshold is likely to have a limited degree of investor interest, which translates into poor liquidity and wide spreads.
- Trading Activity: Trading volume is an excellent indicator of liquidity, regardless of the asset class. Generally speaking, the higher the trading volume for an ETF, the more liquid it is likely to be and the tighter the bid-ask spread.
- Underlying Index or Asset: Consider the underlying index or asset class on which the ETF is based. From the point of view of diversification, it may be preferable to invest in an ETF that is based on a broad, widely followed index.
- Tracking Error: While most ETFs track their underlying indexes closely, some do not track them as closely as they should. An ETF with minimal tracking error is preferable to one with a greater degree of error.
- Market Position: The first ETF issuer for a particular sector often garners the lion's share of assets before others jump in. It is prudent to avoid ETFs that are imitations of an original idea.
When Do ETF Investors Pay Taxes?
When the ETF shares are sold and if the ETF was held in a taxable account, the investor will owe taxes on any capital gains.
What Is a Bid-Ask Spread?
A bid-ask spread is the difference between the highest price that a buyer is willing to pay for an asset and the lowest price that a seller is willing to accept.
What Happens During ETF Liquidation?
The ETF issuer will notify investors when the ETF will stop trading. The investor has to decide on the best course of action to protect the investment and determine whether to sell the ETF shares before the "stop trading" date or hold on to the ETF shares until liquidation.
The Bottom Line
When selecting an ETF, investors should consider factors such as its level of assets, trading volume, and underlying index. In the event that an ETF is to be liquidated, an investor has to decide whether to sell the ETF shares before it stops trading or wait until the liquidation process is completed, with due consideration given to the tax aspects of the ETF sale.
The comments, opinions, and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or adopt any investment strategy. Though we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described in our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.
FAQs
Before purchasing an ETF there are five factors to take into account 1) performance of the ETF 2) the underlying index of the ETF 3) the ETF's structure 4) when and how to trade the ETF and 5) the total cost of the ETF.
How do you evaluate which ETF to buy? ›
The key liquidity factors are:
- The underlying securities of the ETF - highly tradable are better.
- Fund size - larger tends to be better.
- Daily trading volume - more tends to be better.
- Market makers - more is better.
- Market conditions - liquidity can decline when the markets are very volatile.
List of 15 Best ETFs in India
- Nippon India ETF Nifty 50 BeES. ₹ 241.63.
- Nippon India ETF PSU Bank BeES. ₹ 76.03.
- BHARAT 22 ETF. ₹ 96.10.
- Mirae Asset NYSE FANG+ ETF. ₹ 84.5.
- UTI S&P BSE Sensex ETF. ₹ 781.
- Nippon India ETF Gold BeES. ₹ 55.5.
- Nippon India Etf Nifty Bank Bees. ₹ 471.9.
- HDFC Nifty50 Value 20 ETF. ₹ 123.2.
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.
Are ETFs best for beginners? ›
The low investment threshold for most ETFs makes it easy for a beginner to implement a basic asset allocation strategy that matches their investment time horizon and risk tolerance. For example, young investors might be 100% invested in equity ETFs when they are in their 20s.
How to pick a good ETF? ›
Before purchasing an ETF there are five factors to take into account 1) performance of the ETF 2) the underlying index of the ETF 3) the ETF's structure 4) when and how to trade the ETF and 5) the total cost of the ETF.
Why choose ETF over mutual fund? ›
ETFs usually have to disclose their holdings, so investors are rarely left in the dark about what they hold. This transparency can help you react to changes in holdings. Mutual funds typically disclose their holdings less frequently, making it more difficult for investors to gauge precisely what is in their portfolios.
What is the number 1 ETF to buy? ›
Top U.S. market-cap index ETFs
| Fund (ticker) | YTD performance | Expense ratio |
|---|
| Vanguard S&P 500 ETF (VOO) | 7.7 percent | 0.03 percent |
| SPDR S&P 500 ETF Trust (SPY) | 7.6 percent | 0.095 percent |
| iShares Core S&P 500 ETF (IVV) | 7.7 percent | 0.03 percent |
| Invesco QQQ Trust (QQQ) | 5.8 percent | 0.20 percent |
Both Fidelity and Vanguard have a wide variety of low-cost mutual funds and ETFs. If you're simply looking at the options offered by each firm, Fidelity has more options available.
What is the top 3 ETF? ›
Largest ETFs: Top 100 ETFs By Assets
| Symbol | Name | AUM |
|---|
| SPY | SPDR S&P 500 ETF Trust | $525,769,000.00 |
| IVV | iShares Core S&P 500 ETF | $463,097,000.00 |
| VOO | Vanguard S&P 500 ETF | $448,152,000.00 |
| VTI | Vanguard Total Stock Market ETF | $393,402,000.00 |
96 more rowsThe one time it's okay to choose a single investment
You wouldn't ever want to load up your portfolio with a single stock. But if you're buying S&P 500 ETFs, this is the one scenario where you might get away with only owning a single investment. That's because your investment gives you access to the broad stock market.
How many S&P 500 ETFs should I own? ›
SPY, VOO and IVV are among the most popular S&P 500 ETFs. These three S&P 500 ETFs are quite similar, but may sometimes diverge in terms of costs or daily returns. Investors generally only need one S&P 500 ETF.
How long should you hold an ETF? ›
Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.
What is the downside of owning an ETF? ›
The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.
Should I just put my money in ETF? ›
If you're looking for an easy solution to investing, ETFs can be an excellent choice. ETFs typically offer a diversified allocation to whatever you're investing in (stocks, bonds or both). You want to beat most investors, even the pros, with little effort.
What do you actually own when you buy an ETF? ›
There is no transfer of ownership because investors buy a share of the fund, which owns the shares of the underlying companies. Unlike mutual funds, ETF share prices are determined throughout the day. A mutual fund trades only once a day after market close.
What is the best ETF analysis tool? ›
Morningstar excels in its ability to provide a holistic analysis of ETFs. Investors can access detailed information on a fund's historical performance, risk metrics, and expense ratios.
What are the best metrics for ETFs? ›
A favored measure is tracking difference—a statistic that looks at how far an ETF has lagged its benchmark, on average, over a one-year period. Tracking difference incorporates the effects of an entire range of management decisions, from securities lending to optimization decisions.
What is the best indicator for ETF? ›
The MACD, a key indicator for trend-following traders, has been instrumental in analyzing the market dynamics of ETFs like SPD. Traders often look for the crossover of the MACD line and signal line to identify potential buy or sell opportunities.
What are the metrics for valuation of ETFs? ›
To evaluate the fundamental value of an ETF, an investor can analyze the collective fundamental valuation of the ETF's holdings. Some of the key metrics can include ratios, such as price-to-earnings (P/E) or price-to-book (P/B), as well as historical trends and a market comparison.
