Comparing Sector ETFs and ETNs
I am a big fan of asset allocation. Having investments that zig when others zag reduces downside risk and increases compound annual returns. I wrote a four-part series on the topic as well as a special report entitled Asset Allocation Strategies. The report includes actual portfolios with specific ETFs and ETNs mentioned.
ETFs are Perfect for Asset Allocation
For the quickest-fire exposure to all of the important asset classes, exchange-traded funds are the way to go. With just one purchase, you can achieve diversified exposure to virtually anything, be it
The problem is that there are too many ETF choices, about 1000 at last count. How does one know which ETF in each asset class to buy? I can’t go through all 1000 ETFs and ETNs in this article, but I can lay down some criteria to use in sifting out the ETF/ETN winners. Things to look for include:
- Expense ratio (the lower the better)
- Trading volume (the higher the better)
- Legal structure (open-end ETF vs. unit investment trust ETF vs. ETN)
- Portfolio holdings
I’ll look at a few different sector funds and crown a winner based on the criteria above. To help me on my quest, I found three ETF comparison tools on the web that look useful:
So enough talk; let’s start the ETF Smackdown!
S&P 500 Funds
The contenders are the S&P 500 Spiders (NYSE: SPY), iShares S&P 500 (NYSE: IVV), and Vanguard S&P 500 (NYSE: VOO):
|
Fund |
Year-to-Date Performance |
Average Daily Trading Volume |
Expense Ratio |
Notes |
|
SPY |
18.0% |
127 million |
0.09% |
Unit Investment Trust |
|
IVV |
18.1% |
4 million |
0.09% |
Open-End Fund |
| VOO | 18.0% | 725,000 | 0.05% | Share class of $116 billion Vanguard S&P 500 Index Fund (VFINX) |
Winner: iShares. IVV has better performance, decent trading volume, and a legal structure that allows the reinvestment of dividends. In contrast, SPY’s unit investment trust structure doesn’t allow dividend reinvestment. I’m a big believer in reinvesting dividends, so IVV takes the cake. Vanguard’s VOO offering has a minuscule 0.05% expense ratio, but its average daily trading volume is only 725,000 shares and I want more liquidity before jumping on board.
General Bond Funds
The contenders are Vanguard Total Bond Market (NYSE: BND), iShares Barclays Aggregate Bond Fund (NYSE: AGG), and SPDR Barclays Capital Aggregate Bond (NYSE: LAG):
|
Fund |
Year-to-Date Performance |
Average Daily Trading Volume |
Expense Ratio |
Notes |
|
BND |
3.2% |
1.2 million |
0.10% |
Share class of $83 billion Vanguard Total Bond Market Index Fund (VBTLX) |
|
AGG |
3.2% |
1.0 million |
0.22% |
|
|
LAG |
2.9% |
48,000 |
0.1745% |
|
Winner: Vanguard. BND has the best trading volume, the cheapest expense ratio, and its unique structure as a share class of the huge VBTLX open-end fund gives it broader exposure to the bond market than the other ETFs, so less tracking error.
General Commodity Funds
The contenders are iPath DJ-UBS Commodity ETN (NYSE: DJP), PowerShares DB Commodity (NYSE: DBC), and iShares S&P GSCI (NYSE: GSG):
|
Fund |
Year-to-Date Performance |
Average Daily Trading Volume |
Expense Ratio |
Notes |
|
DJP |
3.7% |
294,000 |
0.75% |
ETN that is a debt obligation of Barclays (NYSE: BCS). 36% Energy, 28% Agriculture, 20% Industrial Metals |
|
DBC |
5.4% |
2.4 million |
0.85% |
61% Energy, 21% Agricultural, 10% Industrial Metals |
|
GSG |
1.1% |
198,000 |
0.75% |
78% Energy, 11% Agricultural, 6% Industrial Metals |
Winner: PowerShares. It is the best performer of the three this year and sports the most daily volume. Energy is a good place to be going forward.
As an ETN instead of an ETF, owners of the iPath product run the risk of Barclays defaulting but I feel good about Barclays — LIBOR scandal notwithstanding. It is one of the three largest banks in the United Kingdom. Furthermore, it “stole” Lehman Brothers’ assets out of bankruptcy for a song and did not require a bailout from the British government during the 2008-09 financial crisis (unlike many others). Lastly, an ETN does not have any tracking error (other than management fees) because it does not own actual commodities but is simply a contractual agreement to return the index.
China
The contenders are SPDR S&P China (NYSE: GXC), iShares FTSE/Xinhua
|
Fund |
Year-to-Date Performance |
Average Daily Trading Volume |
Expense Ratio |
Notes |
|
GXC |
7.1% |
132,000 |
0.59% |
Average market cap of $26.5 billion and lowest allocation to financial services (32%) |
|
FXI |
3.1% |
14.4 million |
0.72% |
Average market cap at $69.5 billion and highest allocation to financial service (46%). |
|
|
7.6% |
7,500 |
0.70% |
Average market cap of $24.8 billion and 33% allocation to financial services |
Winner: SPDR. Its trading volume is low, but I like its superior performance, cheap expense ratio, and its lower exposure to financial services.
Healthcare Funds
The contenders are SPDR Health Care (NYSE: XLV), iShares Dow Jones
|
Fund |
Year-to-Date Performance |
Average Daily Trading Volume |
Expense Ratio |
Notes |
|
XLV |
16.7% |
5.0 million |
0.18% |
|
|
IYH |
19.1% |
39,000 |
0.47% |
|
|
VHT |
19.1% |
77,000 |
0.19% |
Most diversified |
|
PTH |
18.2% |
8,100 |
0.60% |
Actively-managed |
Winner: Vanguard. It ties iShares for the best performance, but offers more liquidity and has a much lower expense ratio. The SPDR is the worst performing, but is the cheapest and the most liquid. Since I’m a diversification junkie, I’m going with Vanguard because it owns the largest number of stocks in its portfolio.
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