I’ve been writing about ETFs for almost 15 years. At my job, talking about an ETF by its ticker, and not its name, is the norm. Many of my daily discussions are with people who work elsewhere in the ETF industry or as ETF-focused advisor. When I’m out “in the wild” interacting with extended family or casual friends, I come across some ETF misunderstandings. I’m intrigued by the opportunity to support further education.
Here are a few examples …
The S&P 500 Index Does Not Own 500 Stocks
There are five ETFs tracking the full S&P 500 Index and they own 503 stocks. There are four market-cap-weighted ETFs — the SPDR S&P 500 ETF (SPY), the iShares Core S&P 500 ETF (IVV), the Vanguard S&P 500 ETF (VOO), and the SPDR Portfolio S&P 500 ETF (SPLG). The fifth ETF, the Invesco S&P 500 Equal Weight ETF (RSP), owns the same 503 stocks, but in different proportions than the other ETFs.
How do they get to 503 holdings and not 500? There are 500 companies in the index but a few of them have dual share classes. The largest of these companies is Alphabet. As of mid-August, the A and C shares of Alphabet were 2.1% and 1.86%, respectively, of the market-cap-weighted S&P 500 Index.
Apple, Microsoft, and Nvidia were the largest positions in the S&P 500 Index-based ETFs, while two share classes of Fox Corp were among the smallest.
The NASDAQ 100 Is Not a Technology Index
I will hear weekly someone refer to the Invesco QQQ Trust (QQQ) as a technology ETF. The fund holds102 stocks (see above) that are listed on the Nasdaq Stock Market. However, Invesco’s website has a fact sheet from June 2024 showing 61% of assets in technology. Consumer discretionary (18%), healthcare (6%), and industrials (4%) are other sectors represented. There are even energy and utility companies inside QQQ.
Investors that want a technology index ETF should consider the Technology Select Sector SPDR (XLK) or the Vanguard Information Technology ETF (VGT).
QQQ holds shares of many fast-growing companies. Some of the Magnificent Seven — like Apple, Microsoft, and Nvidia — we can all agree are technology firms. Others, like Costco Wholesale and PepsiCo, are very different.
An ETF’s Average Trading Volume Is Not Very Important
Since an ETF trades on an exchange like a stock, it is easy to think that trading volume means the same for both investments. Large-cap energy stocks like Exxon Mobil and Occidental Petroleum trade millions of shares daily. In contrast, small-caps DMC Global or Nabors Industries trade only hundreds of thousands shares.
However, energy ETFs are baskets of energy stocks, where new shares can easily be created when there is investor demand. The more liquid the underlying stocks, the better. For example, the Texas Oil Index ETF (OILT) is a relatively new energy ETF that owns shares of companies that extract oil and gas from Texas. Though the ETF trades only a few thousand shares daily, it easily could trade much more.
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