Do most ETFs track an index?
An index-based ETF seeks to earn the return of the market or subset of the market that it aims to replicate, less the fees. Most exchange-traded funds (ETFs) attempt to track the performance of an index.
Some ETFs track an index of stocks, thus creating a broad portfolio, while others target specific industries.
The ETF holds a representative sample of the securities that make up the index. A sampling approach is used when there is a large number of holdings in the index, making full replication difficult and costly. The sample aims to match the essential characteristics of the index and to track its returns.
ETFs attempt to replicate as closely as possible the underlying index used as a benchmark. Once an index provider has created an index, ETF providers such as iShares can launch the appropriate ETF. This is then given a security identification number so that it can be clearly identified.
Both ETFs and index mutual funds are pooled investment vehicles that are passively managed. The key difference between them (discussed below) is that ETFs can be bought and sold on the stock exchange (just like individual stocks)—and index mutual funds cannot.
ETFs and index mutual funds tend to be generally more tax efficient than actively managed funds. And, in general, ETFs tend to be more tax efficient than index mutual funds. You want niche exposure. Specific ETFs focused on particular industries or commodities can give you exposure to market niches.
While an S&P 500 index fund is the most popular index fund, they also exist for different industries, countries and even investment styles.
ETFs may be more accessible and easier to trade for retail investors because they trade like shares of stock on exchanges. They also tend to have lower fees and are more tax-efficient.
Market risk
The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.
The biggest difference between ETFs and index funds is that ETFs can be traded throughout the day like stocks, whereas index funds can be bought and sold only for the price set at the end of the trading day. For long-term investors, this issue isn't of much concern.
What ETF mimics the S&P?
SPY, VOO and IVV are among the most popular S&P 500 ETFs. These three S&P 500 ETFs are quite similar, but may sometimes diverge in terms of costs or daily returns.
Launched in March 1999, the Invesco QQQ ETF (QQQ) was the first ETF to begin tracking the NDX. As of September 20, 2022, QQQ had $159.39 billion in assets under management (AUM). Launched in October 2020, the Invesco QQQ ETF (QQQM), known as the Q mini, also tracks the Nasdaq-100.
Two ETFs tracking the same index can have different unit prices, but comparing these prices is generally less important than comparing their performances (or returns). To dig into the performance of each fund, investors can look at: Tracking—How closely has the ETF matched the performance of the index over time?
Yes. Invesco QQQ is a passively managed ETF that tracks the Nasdaq-100 index, which contains some of the world's most innovative companies. For more information on the companies that make up the Nasdaq-100 Index, click here.
Since the job of most ETFs is to track an index, we can assess an ETF's efficiency by weighing the fee rate the fund charges against how well it “tracks”—or replicates the performance of—its index. ETFs that charge low fees and track their indexes tightly are highly efficient and do their job well.
ETFs and mutual funds are managed by experts. Those experts choose and monitor the stocks or bonds the funds invest in, saving you time and effort. Although most ETFs—and many mutual funds—are index funds, the portfolio managers are still there to make sure the funds don't stray from their target indexes.
For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.
At least once a year, funds must pass on any net gains they've realized. As a fund shareholder, you could be on the hook for taxes on gains even if you haven't sold any of your shares.
While these securities track a given index, using debt without shareholder equity makes leveraged and inverse ETFs risky investments over the long term due to leveraged returns and day-to-day market volatility. Mutual funds are strictly limited regarding the amount of leverage they can use.
Vanguard S&P 500 ETF holds a Zacks ETF Rank of 2 (Buy), which is based on expected asset class return, expense ratio, and momentum, among other factors. Because of this, VOO is a great option for investors seeking exposure to the Style Box - Large Cap Blend segment of the market.
Which ETF tracks the Dow Jones index?
Our recommendation for the best overall S&P 500 index fund is the Fidelity 500 Index Fund. With a 0.015% expense ratio, it's the cheapest on our list. And it doesn't have a minimum initial investment requirement, sales loads or trading fees. Over the last 10 years, FXAIX has returned an annualized 12.02%.
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.
The choice comes down to what you value most. If you prefer the flexibility of trading intraday and favor lower expense ratios in most instances, go with ETFs. If you worry about the impact of commissions and spreads, go with mutual funds.
For most investors, ETF trades take place with other investors, and not with the fund company itself. That means the fund company doesn't have to process your order; doesn't have to mail you the same documents; and doesn't have to go into the market to process your order. Less work = lower costs.
