What is an ETF? -- Know What Your Fund Holds | ETF Trends

In a race to gather more assets under management, exchange traded fund providers have been lowering their expense ratios over the past few months. Heavyweight providers such as Vanguard and State Street have been cutting fees, possibly distracting investors on what really matters when it comes to ETF investing.

“Although we think the cheaper expense ratios are for the better, we view these actions of two of the three largest ETF providers (BlackRock is the largest) in the U.S. as more a distraction from what we believe investors should be paying attention to,” Todd Rosenbluth, S&P Capital IQ ETF Analyst, said in a recent report. [How ETFs Have Evolved]

What investors should focus on when investing in ETFs is what the holdings are. The price tag is secondary because the holdings are going to give the investor returns, not the expense ratio. [Diversified ETFs vs. Sector Funds]

For instance, if you take the SPDR Consumer Discretionary Select SPDR Fund (NYSEArca: XLY) and compare it to the Vanguard Consumer Discretionary Index Fund (NYSEArca: VCR), the differences become apparent. Both funds hold the same five companies, but the weighting, and therefore, the performance, differs. [Why Are ETFs Cheaper Than Mutual Funds?]