ETFs That We Are Thankful For (BOND, IAU, GLD, SPY, IVV, VOO)
Neena Mishra: Exchange traded funds (ETFs) have come a long way since January 1993–when the first ETF was introduced to the market. The ETF world has grown exponentially since then and currently there are more than 1400 U.S. listed products with about $1.3 trillion in assets under management. And there are more than 900 products in registration, currently awaiting clearance from the SEC.
With their low-cost, efficiency, flexibility and transparency, the ETFs have grown in popularity and number and types of products has surged. ETFs opened doors to investing in the new areas in the markets (asset class, style, currencies, commodities or geography) that were earlier inaccessible to regular investors. (Three Biggest Mistakes of ETF Investing)
ETFs are popular not only with the retail investors but also with institutional investors like pension funds, foundations and asset managers. Retail investors love the ETFs because among others, they also do not impose any minimum investment limits, unlike some of the index funds. Many investors both individual as well as institutional use the ETFs for strategic asset allocation, tactical trading strategies or risk management.
But there are certain ETF products that are pioneer in the investing world since they changed the way we invest. Thanksgiving week may be the right time to be thankful for such ETFs.
SPDR S&P 500 (NYSEARCA:SPY)
It all started with a spider. The ETF that started the ETF revolution still remains most popular with the investors, with about $101 billion in AUM. The ETF tracks the S&P 500 index and is a proxy for the broader U.S. stock market.
For investors who do not believe in or do not want to spend a lot of time in sector or stock picking and still want to remain exposed to the U.S. equities, this ETF is a low-cost and convenient choice. (Three Excellent ETFs with more than 4% Yields)
SPY has exposure to almost all important sectors with Information Technology, Financials, Healthcare and Consumer Discretionary being the top four sectors. In terms of individual holdings, Apple Inc. occupies the top spot, followed by Exxon Mobil, Microsoft, IBM and General Electric, AT&T.
The fund is well diversified one, with top ten holdings accounting for just about 20% of the portfolio. The expense ratio is extremely low at 9 basis points, but this is not the cheapest large-cap blend ETF choice available to the investors now. It pays out a dividend yield of 2.09% currently.
SPY has excellent liquidity and trades in high volumes, and thus it is an ideal choice for large trades but retail investors have two other slightly cheaper alternatives available in iShares Core S&P 500 ETF (NYSEARCA:IVV) and Vanguard S&P 500 ETF (NYSEARCA:VOO). IVV and VOO charge seven and five basis points respectively for annual expenses.
SPDR Gold Trust (NYSEARCA:GLD)
Gold has attracted investors’ attention for a very long time, not only due to its status as store of value and inflation-hedge, but also due to excellent diversification that it provides to the portfolio.
Many investors avoided investing in gold earlier just due to high trading costs and inconvenience associated with buying and storing the bullion. GLD, launched in 2004 provided an innovative, cost-efficient and secure way to invest in the metal to such investors.
Thus it’s no surprise that GLD is the second most popular ETF with about $75 billion in assets under management. (Shine and Protect your portfolio with Gold ETFs)
It seeks to replicate the performance of the gold bullion and is backed by physical holding of gold bullion in London vaults. It charges 40 basis points for annual expenses.
While GLD is the largest, most liquid and widely traded gold ETF, iShares Gold Trust (NYSEARCA:IAU) presents a much cheaper option to GLD with its expense ratio at 0.25% per year. GLD trades in higher volumes and has slightly lower bid-ask spreads, compared with IAU, which may result in some benefit for very large trades. But for most retail investors, IAU is a more cost-effective option.
PIMCO Total Return ETF (NYSEARCA:BOND)
BOND is the ETF version of PIMCO’s flagship blockbuster mutual fund–the PIMCO Total Return Institutional Fund.
BOND is a very popular product since it provides the opportunity of getting the portfolio management expertise of Bill Gross, one of the most respected investment managers in the world. The ETF has become the second-most-successful exchange-traded-product launch since GLD’s launch in 2004.
The ETF currently has $3.7 billion in AUM and charges an expense ratio of 55 basis points per annum. Though the ETF does not use swaps or other similar derivative instruments which are in the mutual fund versions of the product (due to SEC rules), it has been outperforming its mutual fund counterpart since inception in March this year.
The ETF has returned 10.1% since its inception and it pays out a decent yield of 2.5%. The portfolio currently holds 873 securities with an effective maturity of 7.6 years and effective duration of 4.8 years.
According to some industry experts actively managed bond ETFs are likely to become popular in future and further with time-proven success of PIMCO Total Return strategy, we expect this ETF to be an outperformer in the fixed income world.
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