The exchange traded fund market has continued to grow with assets from both institutional and individual investors alike. As the business becomes more commonplace with retail investors, the need for more ETF education is growing.
Certain aspects of an exchange traded fund investing may not be understood by some investors. There are basic characteristics of ETFs such as structure and index construction that are important functions to how returns are generated. [Build a Diversified Investment Portfolio with 3 ETFs]
Many ETFs such as the SPDR S&P 500 (NYSEArca: SPY) track a basic benchmark such as the S&P 500 and is basic to understand, reports Roger Wohlner for The Chicago Financial Planner. As the ETF industry continues to expand, there are new benchmarks created and more niche funds created to cater to them.
The more complicated the index is, the harder it is to understand. The more complex indices are usually best left for sophisticated investors. A recent Vanguard report said that of the 1,400 ETFs trading, about 1,000 track hybrid or complex indices, reported by Chuck Jafffe. [Some Outperforming ‘Smart Beta’ ETFs]
A peek at how complicated index structure gets can start by looking at the large-cap growth sector – Schwab U.S. Large Growth Index (NYSEArca: SCHG), Vanguard Growth ETF (NYSEArca:VUG), and the iShares Russell 1000 Growth ETF (NYSEArca: IWF). All three ETFs track the same index style, but differ in sector weighting, top holdings, or companies held. [Large-Cap Equity ETFs Outperforming in 2013]