A beginner’s guide to US-listed ETFs

09 Nov 2022 | 17 min read | 4 Comments

Investment platforms like Sharesies, Hatch, and Stake give you access to the United States sharemarkets, where you can invest in hundreds of ETFs (Exchange Traded Funds) from various fund managers including Vanguard, iShares, and SPDR. ETFs are incredibly popular among investors as each one invests in a wide range of assets, allowing you to invest without having to research individual companies. In addition, most of them are passively managed index funds and have very low fees, though a few ETFs are actively managed. In this article we’ll be covering the 100 largest ETFs in the US to help you navigate the different options, and get an idea of what the various funds invest in.

This article covers:
1.S&P 500 and US broad market ETFs
2. Characteristic specific ETFs
3. Sector specific ETFs
4. International ETFs
5. Bond ETFs
6. Other ETFs

1. S&P 500 and US large cap ETFs

The ETFs in this section invest broadly across the US sharemarket, containing many companies across several different industries. They have a focus on investing in the largest, most recognisable US companies.

S&P 500

S&P 500 ETFs are by far the most famous ETFs, investing in the 500 largest companies listed on the US sharemarkets. The funds are diversified across many companies and industries, yet are easy to understand, have low fees, and are very accessible. Therefore they’re popular options for investors to use as a core part of their portfolios. Here’s the various options (with the management fees in brackets):

There’s no substantial differences between the various options and no difference in the underlying companies held by each fund. However, SPDR somewhat confusingly offers two S&P 500 ETFs:

  • SPY is the original iShares S&P 500 ETF and has a higher management fee, but is more liquid, making it more suitable for traders.
  • SPLG is a newer ETF which has lower fees (to better compete with Vanguard and iShares), but is less liquid, making it more suitable for long-term buy and hold investors.

Top 10 holdings of the Vanguard S&P 500 ETF
1. Apple
2. Microsoft
3. Amazon
4. Alphabet (Class A)
5. Alphabet (Class C)
6. Berkshire Hathaway
7. United Health
8. Johnson & Johnson
9. Exxon Mobil
10. Meta

That’s not all for our S&P 500 ETFs. Invesco offers a fund which has a slightly different take on the S&P 500:

  • RSP – Invesco S&P 500® Equal Weight ETF (0.20%): Each company in the ETF is weighted equally (each making up approximately 0.20% of the fund), as opposed to traditional S&P 500 ETFs which are market cap weighted (meaning the larger the company, the larger the proportion it takes up in the fund). This equal weighting gives this ETF much greater exposure to the smaller companies of the S&P 500.

Further Reading:
– What do NZX 50, S&P 500, and Total World index funds actually invest in?


Beyond the S&P 500

These ETFs invest in the S&P 500, but go beyond that by also investing in a large number of smaller US companies:

While these ETFs also invest beyond the S&P 500, but not by much, each holding around 600-700 of the largest US-listed companies:

With their larger spread of companies, these ETFs can be considered more diversified than an S&P 500 ETF (though it can be argued that the S&P 500 is already diversified enough). However, it’s probably not worth investing in these funds together with an S&P 500 ETF, as they overlap significantly – The companies of the S&P 500 already make up a large proportion of these ETFs.


Other large cap ETFs

  • QQQ – Invesco QQQ Trust (0.20%): Contains the 100 largest non-financial companies listed on the Nasdaq, which is one of the US’ major stock exchanges. The fund is heavily exposed to tech related companies like Apple, Microsoft, and Alphabet.
  • DIA – SPDR Dow Jones Industrial Average ETF Trust (0.16%): Tracks the Dow Jones Industrial Average, an index containing 30 “blue chip” US companies. These companies are considered mature, reliable, and stable, but are likely to have lower growth prospects.
  • ESGU – iShares ESG Aware MSCI USA ETF (0.15%): Invests in around 300 of the largest US companies, excluding those involved with civilian firearms, controversial weapons, tobacco, thermal coal, and oil sands.
  • DFAC – Dimensional U.S. Core Equity 2 ETF (0.19%): An actively managed ETF, investing in around 2,600 US companies.

2. Characteristic specific ETFs

The ETFs in this section invest in companies that meet some kind of specific characteristic. They’re not diverse enough to make up a core part of your portfolio (given their characteristic specific focus), and will probably overlap with the broad market funds covered in the above section (e.g. an S&P 500 ETF will already contain a mixture of growth, value, and dividend paying companies). Instead the role of these ETFs is to supplement and tilt your portfolio towards a certain characteristic.

Growth ETFs

These ETFs only invest in companies considered to be “growth” companies. These are companies seen as having a higher potential to grow, but tend to be less mature and/or are more volatile. Therefore these growth ETFs tend to have a heavy bias towards technology companies.

Top 5 holdings of the Vanguard Growth ETF
1. Apple
2. Microsoft
3. Amazon
4. Tesla
5. Alphabet (Class A)


Value ETFs

These ETFs only invest in companies considered to be “value” companies. These are companies seen as being more mature and stable, and they usually pay out higher dividends. However, they have less potential to deliver capital growth. Value ETFs tend to have a heavy bias towards energy, financial, and consumer staples companies.

Top 5 holdings of the Vanguard Value ETF
1. UnitedHealth
2. Berkshire Hathaway
3. Johnson & Johnson
4. Exxon Mobil
5. JPMorgan Chase


Dividend ETFs

Dividend ETFs invest in companies with one of the following two characteristics in relation to their dividends:

Dividend Yield

These ETFs simply invest in companies with a high dividend yield, or in other words companies that pay out a high level of dividends:

Dividend Appreciation/Growth

These ETFs consider more than just yield. They invest in companies with a track record of growing their dividends over the long-term (even though their dividend yields might not be the absolute highest):

Yields of various Vanguard Dividend ETFs vs the S&P 500
– VYM (Dividend yield): 3.39%
– VIG (Dividend appreciation): 2.13%
– VOO (S&P 500): 1.77%

The higher yields of these dividend ETFs can be tempting for many investors, but they’re likely to come with lower capital growth (and therefore lower overall returns) over the long-term. While the Vanguard Dividend Appreciation ETF (VIG) has done slightly better than VOO in recent years (mainly due to this year’s market downturn), the Vanguard High Dividend Yield ETF has underperformed substantially over the last 5 years.

5 year capital growth of various Vanguard Dividend ETFs vs the S&P 500
– VOO (S&P 500): 45.65%
– VIG (Dividend appreciation): 50.62%
– VYM (Dividend yield): 28.75%


Mid-Cap ETFs

These ETFs invest in mid-size companies. They’re generally seen as having slightly higher potential for growth, but come with slightly higher risk:

These ETFs only invest in mid-cap value companies:


Small-Cap ETFs

These ETFs only invest in small sized companies on the US sharemarket. They’re generally seen as having the most potential for growth, but come with higher risk.

This ETF only invests in small-cap value companies:


Other characteristics

3. Sector specific ETFs

The ETFs in this section only invest in US companies that operate in a specific sector/industry:

These ETFs aren’t diversified enough to make up a core part of your portfolio, given their sector-specific focus. In addition, a broad market fund (like an S&P 500 ETF – see sector breakdown below) will already invest in all of these sectors, so adding a sector specific ETF to your portfolio may result in some overlap or concentration towards that particular sector. However, these ETFs can still be useful if you intentionally want to increase your portfolio’s exposure to an industry that you like.

Sector breakdown of the S&P 500
1. Information Technology (26.3%)
2. Health Care (15.3%)
3. Financials (11.4%)
4. Consumer Discretionary (10.9%)
5. Industrials (8.3%)
6. Communication Services (7.5%)
7. Consumer Staples (6.9%)
8. Energy (5.4%)
9. Utilities (3.0%)
10. Real Estate (2.6%)
11. Materials (2.5%)

4. International ETFs

So far in this article all the funds we’ve covered only contain US-listed companies (which arguably doesn’t provide enough geographical diversification). Now we’ll look at some ETFs which invest in shares from other countries. But before we do so, here’s a tax leakage issue to be aware of:

Tax leakage
The downside of investing in non-US shares via a US-listed ETF is tax leakage – an issue caused by the fact that tax credits relating to the dividends paid by non-US shares in each fund can’t be claimed by NZ investors. A US ETF fully invested into non-US shares is likely to have around a 0.30% higher tax impact compared to a fully tax efficient fund.

We cover the issue of tax efficiency more comprehensively in the below article:

Further Reading:
– What’s the best global shares index fund in 2022?

Global ETFs

These ETFs invest globally, containing companies from both the United States and the rest of the world. That gives you much more geographical diversification than something like an S&P 500 ETF.

Given these funds have such a large exposure to US, you probably wouldn’t want to invest in both a Global ETF and an S&P 500 ETF, as that would cause you to double up on US companies.

Top 10 country breakdown of the Vanguard Total World Stock ETF
1. United States (60.70%)
2. Japan (6.10%)
3. United Kingdom (3.80%)
4. China (3.40%)
5. Canada (3.10%)
6. France (2.30%)
7. Switzerland (2.30%)
8. Australia (2.10%)
9. India (2.00%)
10. Germany (1.70%)


Global ex US ETFs

The following ETFs invest globally, but exclude investment into US companies.

Developed markets only

These ETFs only invest in developed markets, which are countries with more mature and advanced economies like Canada, UK, Japan, and Australia:

Emerging markets

These funds also invest in emerging markets (like China, Taiwan, India, Brazil, and South Africa), in addition to developed markets. Emerging markets are seen as having a higher potential for return, but less stable than developed markets:

Top 10 holdings of the Vanguard Total International Stock ETF
1. Taiwan Semiconductor Manufacturing Co
2. Nestle
3. Tencent
4. Roche
5. Samsung Electronics
6. Shell
7. AstraZeneca
8. ASML
9. Toyota
10. Alibaba

Given these ETFs exclude US shares, an investor could use them to add geographical diversification to their portfolio without overlapping with an S&P 500 or other US ETF.


Regional ETFs

These ETFs invest only in companies listed in a specific region like Emerging Markets:

Or Europe:

You can already invest in these regions as part of the above global funds, but these ETFs can be used to increase your portfolio’s exposure to a specific region.

5. Bond ETFs

Bonds are typically used as short to medium-term investments, or to lower the volatility of an investment portfolio. But investing in US-listed bond funds come with a few issues:

  • Currency hedging – International bonds are traditionally currency hedged to remove the impact of exchange rate volatility on your bonds. However, all US-listed bond ETFs are not currency hedged to the NZ dollar.
  • Tax – Overseas bonds ETFs are considered FIFs, and are taxed the same way as share ETFs, even though bonds provide lower potential returns. For example, let’s say your investment in overseas shares returned 10%, and your investment in overseas bonds returned 0% for the year. Under the FIF tax rules:
    • Using the FDR method, both your shares and bonds would be taxed based on a 5% return (even though your bonds returned 0%!)
    • Using the CV method, your bonds would be taxed based on a 0% return, but your shares would be taxed based on a 10% return (which is unfavourable to the FDR method).
  • Fees – While US bond ETFs have cheaper management fees compared with NZ bond ETFs, you need to pay brokerage and FX fees to buy and sell them. The shorter-term nature of these ETFs means you might not be holding them long enough for the cheaper management fees to offset the brokerage and FX fees.

The alternative is to use a NZ domiciled bond fund which solves the above issues. But for completeness, we’ll briefly cover the US-listed options below:

Further Reading:
– Smartshares vs SuperLife vs Macquarie vs Simplicity – Bond index fund shootout

Broad market bond ETFs

These ETFs invest in a mix of different types of bonds including government bonds, corporate bonds, and mortgage-backed securities. They invest in a mix of short, medium, and long-term bonds:

While this ETF only invests in short-term bonds (those maturing within 1-5 years):


Government bond ETFs

These ETFs only invest in Treasury bonds or Treasury bills, which are government issued bonds. This ETF invests in a mix of short, medium, and long-term government bonds:

These ETFs only invest in short-term bonds. These are lower risk (as interest rate changes have less influence on them), but offer lower potential returns. These two funds contain ultra-short term bonds which mature within 12 months:

And these funds contains short-term bonds maturing within 1-3 years:

These ETFs only invest in intermediate-term bonds. They offer slightly higher yields, and come with slightly higher risk:

Lastly, this ETF only invests in long-term bonds. They offer the highest potential returns, but come with the highest risk:

Dividend yields of various iShares Government Bond ETFs
– GOVT (Broad maturity government bonds): 1.39%
– SHV (Ultra-short term government bonds): 0.43%
– SHY (Short-term government bonds): 0.64%
– IEF (Intermediate-term government bonds): 1.52%
– TLT (Long-term government bonds): 2.34%


Corporate bond ETFs

These ETFs only invest in corporate bonds, which are issued by a business rather than a government. This ETF invests in a mix of short, medium, and long-term corporate bonds:

These ETFs only invest in short or intermediate-term corporate bonds:

This ETF invests in high yield corporate bonds, otherwise known as “junk bonds”. These bonds have much lower credit ratings, and the companies that issue these bonds have a higher likelihood of going bust. To compensate for this risk, the yields of these bonds are much higher than the safer “investment grade” bonds.

Dividend yields of various iShares Corporate Bond ETFs
– LQD (Investment grade corporate bonds): 3.09%
– IGSB (Short-term investment grade corporate bonds): 1.79%
– HYG (High yield corporate bonds): 5.17%


Other US bond ETFs

These ETFs invest in TIPS (Treasury Inflation-Protected Securities), which are a special type of government issued bond that adjusts its principal value according to inflation (e.g. when inflation increases, so will the value of each bond). This adjustment means they’re seen as a way to hedge against inflation, though the price of each bond can still be impacted by interest rates:

These ETFs invest in municipal bonds, which are issued by local government organisations in the US:

These ETFs invest in mortgage-backed securities, which essentially involve lending your money out as a home loan and receiving regular interest payments in return. Mortgage-backed securities often have a bad reputation due to the role they played in causing the Global Financial Crisis. However, tighter regulations these days should make them relatively safer than they were back in the 2000s.


International bond ETFs

These ETFs invest in non-US bonds:

6. Other ETFs

Gold ETFs

These ETFs invest in physical gold:

Check out our below article for more info on investing in gold.

Further Reading:
– Gold and Silver – Is it investing or gambling?


Other asset classes

These ETFs invest in assets that don’t quite fit into any of our other categories:

  • JPST – JPMorgan Ultra-Short Income ETF (0.18%): Invests in cash equivalents/ultra-short term debt.
  • JEPI – JPMorgan Equity Premium Income ETF (0.35%): Invests in a selection of S&P 500 companies, plus trades options to generate income.
  • PFF – iShares Preferred & Income Securities ETF (0.45%): Invests in preferred stock which is a bit like a hybrid between shares and bonds. Like shares, they represent a portion of ownership of a company, but similar to bonds, they pay semi-permanent dividends and are more limited in their potential capital growth.

Beyond the top 100

In this article we’re just scratching the surface with our coverage of the 100 largest US-listed ETFs. There’s hundreds more ETFs on the US market, so here’s a high-level overview of some of the other types available to invest in:

Country specific ETFs – Invests in companies listed in a specific country. For example, the iShares MSCI New Zealand ETF (ENZL), which invest in NZ shares (though such an ETF would be an expensive, tax inefficient, and roundabout method to invest in NZ shares). Check out the below article for more efficient ways to invest in NZ shares:

Further Reading:
– What’s the best NZ shares index fund in 2022?

Thematic ETFs – Invests in companies that relate to a specific theme. For example, the iShares Global Clean Energy ETF (ICLN) which invests in companies involved with the provision of renewable energy, or the SPDR SSGA Gender Diversity Index ETF (SHE), which only invests in US companies with a high proportion of women in executive and director positions.

Currency ETFs – Invests in a currency. For example, the Invesco CurrencyShares Australian Dollar Trust (FXA) which invests 100% into Australian Dollars, or ProShares Bitcoin Strategy ETF (BITO) which invests into Bitcoin futures contracts.

Commodity ETFs – Invests in commodities. For example, the iShares Silver Trust (SLV), or the Teucrium Soybean Fund (SOYB).

Inverse ETFs – Can be used to bet against/short a particular market. For example, the ProShares Short S&P500 (SH) moves inversely to the S&P 500 – if the S&P 500 index were to fall, then SH would rise.

Leveraged ETFs – Can be used to magnify your returns in a particular market. For example, the ProShares Ultra S&P 500 ETF (SSO) is 2x leveraged on the S&P 500. If the S&P 500 were to increase, then SSO would increase by roughly double the amount. If the S&P 500 were to decrease, then SSO would decrease by roughly double the amount.

Frequently asked questions

How do US ETFs compare to NZ domiciled funds?

Smartshares, Kernel, Macquarie are NZ based fund managers which offer similar (or even identical) alternatives to US-listed ETFs, such as:

These are all NZ domiciled fund options, which we’ve covered in more detail in the article below:

Further Reading:
– The ultimate guide to index funds in New Zealand

Here’s the pros and cons of US-listed ETFs compared to these NZ domiciled options:

Pros of US-listed ETFs

  • More choice – While the selection of NZ domiciled funds is more than enough to build a well-diversified portfolio, the options are far greater if you choose to invest in US ETFs. That’s especially useful if you’re after a niche, specialty ETF like a commodity ETF or a specific thematic one.
  • Lower management fees – The annual management fees for US ETFs starts from just 0.03%. While most NZ domiciled index funds have much higher management fees, usually falling between 0.20% and 0.40%.

Cons of US-listed ETFs

  • Brokerage fees – Most investment platforms charge brokerage fees each time you buy or sell US-listed ETFs. NZ domiciled funds usually don’t charge such fees (though they might have higher spreads than US ETFs).
  • Foreign exchange – Buying into US ETFs requires you to change your NZ dollars into US dollars. And selling them requires you to change US dollars back to NZ dollars. Both of which will incur foreign exchange fees. This fee can be avoided by investing in a NZ domiciled fund.
  • Currency hedging – Being overseas assets, the value of your US ETFs will fluctuate alongside exchange rate fluctuations. There’s no NZ dollar hedged option with these funds. On the other hand, many NZ fund managers offer a hedged option which help minimise the impact of currency movements on your investment.

Other considerations

  • Tax – US-listed ETFs are foreign investments and fall under the FIF tax rules, while NZ domiciled funds are structured as PIEs. It’s impossible to say for sure whether a FIF or PIE will work out to be more tax efficient, as it will largely depend on factors like how much you’re investing, your tax rate and so on. But in either case FIFs are generally more complex and require more admin work.

Overall there’s no clear winner when it comes to US-listed ETFs vs NZ domiciled funds. They work out to be fairly similar when you take into account all the various pros and cons. Check out our articles below for more details on the pros and cons, as well as the tax considerations for these funds:

Further Reading:
– What’s the best S&P 500 index fund in 2022?
– Tax on foreign investments – How do FIF and Estate Taxes work?


What’s the best platform to use for US ETFs?

Unfortunately there’s no definitive best platform to use to invest into US ETFs. They all have slightly different features and fee structures, making each platform suitable for different people. For example:

  • Sharesies – Their percentage based fee structure makes them more suitable for those investing small amounts at a time.
  • Hatch and IBKR – These platforms have a more flat fee structure, making them more suitable for those intending to invest larger amounts (over a few hundred dollars) at a time. In addition IBKR has a larger selection of US ETFs compared with Sharesies/Hatch/Stake – Great if you’re after a more niche ETF.
  • Stake – They have high foreign exchange fees, but no brokerage fees, perhaps making them better suited to those wanting to frequently trade in and out of US shares and ETFs.

Check out our articles below for more details on each platform:

Further Reading:
– Buying shares in the USA – Sharesies vs Hatch vs Stake
– Interactive Brokers & Tiger Brokers review – Better than Sharesies & Hatch?

Conclusion

There’s heaps of ETFs to choose from when it comes to the US market, but that doesn’t mean you should feel any pressure to invest in them all. A small handful of ETFs is enough to provide a diverse investment portfolio. For most people having the core of their portfolio in a broad market ETF like VT (Total World) or even VOO (S&P 500 which is more US-centric) is sufficient. Adding more funds could result in making your portfolio more complex (and potentially having your funds overlap with each other), and higher fees. Check out our article below for different approaches you could take in building a long-term investment portfolio.

Further Reading:
– 6 ways to build a long-term investment portfolio in New Zealand

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Disclaimer

The content of this article is based on Money King NZ’s opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with an authorised financial adviser before making any investment decisions.


Comments

  1. MoneyKingNZ, how about sharing your thoughts about the Investnow Foundations S&P 500 and Total World funds announced yesterday? (specially concerning the 0.50% transaction fee)

    Reply

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