Although exchange traded funds (ETFs) provide an easy way to gain broad exposure to different market sectors, not all of them are created equal. ETFs that track the same sector, related indexes, and even the same index will vary in performance because of a number of different factors.
For example, let’s compare RevenueShares Financials Sector Fund (NYSEArca: RWW) to PowerShares Dynamic Financial Sector Portfolio (NYSEArca: 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 (NYSEArca: VWO) charges 0.45% less than iShares MSCI Emerging Markets Index Fund (NYSEArca: 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 (NYSEArca: SPY) has a bid-ask spread of only one cent compared to the $23 billion iShares S&P 500 Index Fund (NYSEArca: IVV) spread of four cents.