Tom Lydon
submits:
same
For example, let's compare
RevenueShares Financials Sector Fund (
RWW
)
to
PowerShares Dynamic Financial Sector Portfolio (
PFI
)
. Both funds track the financial sector, but they differ in their
index composition and methodology. RWW weights stocks by revenue
rather than market value, while PFI looks at trailing stock
performance amongst other factors. As a result, RWW loaded up on
the banking giants while PFI invested more in regional and
community banks. The result? RWW gained 97% to PFI's 33% over the
past 12 months,
reports Reshma Kapadia for
The Wall Street Journal
.
Here are some factors to consider when choosing an ETF:
The
expense ratio
will have a direct impact on fund returns and vary from fund to
fund. For example,
Vanguard Emerging Markets ETF (
VWO
)
charges 0.45% less than
iShares MSCI Emerging Markets Index Fund (
EEM
)
. As a result, investors poured $4 billion more into VWO than EEM
last year.
The
fund size
can have a direct impact on trading costs because volume helps keep
trading costs low. For example, the $78 billion dollar
SPDR S&P 500 ETF Trust (
SPY
)
has a bid-ask spread of only one cent compared to the $23 billion
iShares S&P 500 Index Fund (
IVV
)
spread of four cents.
The
capital structure
affects funds in specific ways that can affect performance and
risk. For example,
Vanguard Total Bond Market (
BND
)
is a share class of the $68.8 billion sister bond fund, which helps
offset the risk of illiquid securities. Thus, BND can invest in a
broader range of bonds compared to the smaller
iShares Barclays Aggregate Bond Fund
(
AGG
)
and
SPDR Barclays Capital Aggregate Bond ETF
(
LAG
)
. The effect can be seen in their annual returns: AGG and LAG have
had annual returns that varied up to 3.2% off the market index,
whereas BND has never veered more than 2.3%.
Finally, the
composition
of funds can also impact both performance and risk. For example,
PowerShares QQQ Trust, Series 1 (
QQQQ
)
tracks the Nasdaq 100 index of non-financial stocks while
Fidelity NASDAQ Composite Index Fund ETF-Tracking NUS (
ONEQ
)
tracks almost all 2,000 stocks in the Nasdaq. Over the last five
years, QQQQ's average annual return has been 6.1% compared to
ONEQ's 4.4%.
iShares FTSE/Xinhua China
(
FXI
)
is the largest China ETF, but holds only 25 of the largest and most
liquid stocks in China, resulting in about half of its assets
allocated to state-owned and financial stocks. Compare that to
SPDR S&P China ETF
(
GXC
)
which holds 129 different stocks and provides diversification
against China's fiscal policies.
Sumin Kim contributed to this article.
See also
Slide in Gold: The Euro, China and Goldman
Sachs
on seekingalpha.com