If you're looking for the best ETFs to buy, an excellent place to begin is with the largest ETFs measured by assets under management. Unlike their mutual fund cousins, exchange-traded funds (ETFs) with the highest amount of money invested in them can have advantages over ETFs with lower assets under management.
A Brief ETF Refresher
ETFs passively track a benchmark index, similar to how index mutual funds work. Therefore, the best ETFs will also have the lowest expense ratios. For example, if you're considering an ETF that invests in the S&P 500 Index, the one with the lowest expense ratio is likely to be your best choice.
However, if the expense ratios are relatively close, you'll want to choose the one with the highest assets under management.
Assets Under Management
A mutual fund's net assets under management (AUM)—not to be confused with Net Asset Value (NAV)—represents the total of all investor dollars invested in all share classes of the fund. Conversely, ETFs are no-load, index-based funds that trade like stocks and have only one share class.
This core difference is the basis for which the largest ETFs are often the best funds to buy within their respective categories.
How to Buy the Best ETFs: AUM, Volume and Expenses
When buying exchange-traded funds (ETFs), one of the essential qualities you'll want to look for is assets under management. Trading volume, expenses, and tracking records are also important data points to research. The reason for the high assets and trading volume is that investors try to avoid buying thinly traded ETFs.
When there are fewer traders (implying lower volume), there is potential for more significant swings in price (or what is called the "spread"). Like closed-end mutual funds, ETFs can trade at a premium or discount. The higher the assets and trading volume, the tighter the spread.
For clarity, higher assets and greater trading volume are generally better than lower assets and lower trading volume.
Finally, ETFs with good tracking records are usually better to buy than those with poor ones. The tracking record is how closely the ETF has tracked the benchmark. The closer it stays to the benchmark, the better the fund is doing.
Going back to the original point, ETFs with the highest assets under management will also tend to have higher trading volume, low expenses, and good tracking. For this reason, the most important thing to look for in the best ETFs is assets under management.
10 Best ETFs by Assets Under Management (AUM)
The best ETFs most often have the highest assets under management (AUM). They will also have a higher trading volume, which cuts down on the spread between the asking price and the buying price. Also, a higher AUM indicates a higher quality fund with a long track record.
Here are the largest 10 ETFs by AUM sorted by company, then AUM.
Standard & Poor's
SPDR S&P 500 (SPY), AUM $278 Billion
This fund is the oldest ETF on the market. SPY tracks the S&P 500 index, which includes about 500 of the largest U.S. stocks. SPY has an expense ratio of 0.09% or $9 for every $10,000 invested.
Vanguard Total Stock Market ETF (VTI), AUM $115 Billion
As the original pioneer of indexing, Vanguard has some of the best ETFs with high assets on the market. Like their popular mutual fund, Vanguard Total Stock Market Index (VTSAX), VTI tracks the Dow Jones U.S. Total Stock Market Index. The expense ratio for VTI is a low 0.03%.
The Dow Jones U.S. Total Stock Market Index tracks all stocks on the market—around 3,500 stocks.
Vanguard S&P 500 ETF (VOO), AUM $113 Billion
VOO is another ETF that tracks the S&P 500, but it's also one of the cheapest. It has a low expense ratio of just 0.03%.
Vanguard FTSE Emerging Markets ETF (VWO), AUM $73 Billion
VWO tracks the FTSE Emerging Markets All Cap China A Inclusion Index, which represents large-, mid-, and small-cap stocks of companies located in emerging markets worldwide. Expenses for VWO are 0.05%.
Vanguard FTSE Developed Markets ETF (VEA), AUM $71 Billion
VEA tracks the FTSE Developed All Cap ex-US Index, representing approximately 3,700 common stocks of large-, mid-, and small-cap companies located in Canada and the major markets of Europe and the Pacific region. Other countries include Japan, the United Kingdom, Germany, Switzerland, and Australia. Expenses for VEA are 0.07%.
Invesco QQQ (QQQ), AUM $76 Billion
QQQ tracks the NASDAQ 100, which primarily consists of technology stocks and some healthcare, biotechnology, and consumer discretionary stocks included. The expense ratio for QQQ is 0.20%.
iShares Core S&P 500 (IVV), AUM $179 Billion
iShares, by BlackRock, is the largest ETF company in the world. IVV is its biggest fund. IVV tracks the S&P 500 index and has a low expense ratio of just 0.04%, which is among the lowest that tracks the S&P 500.
iShares Core MSCI EAFE (IEFA), AUM $64 Billion
IEFA is another ETF to make our list that tracks the MSCI EAFE, which includes stock of companies in non-U.S. countries in Europe, Japan, and Australia. Expenses for IEFA are 0.08%.
iShares MSCI EAFE (EFA), AUM $63 Billion
EFA is the biggest ETF that invests in international stocks. The fund tracks the MSCI EAFE index, which includes over 900 stocks outside of the United States. The expense ratio for EFA is 0.31%.
iShares Core US Aggregate Bond (AGG), AUM $60 Billion
The largest bond ETF in the world, as measured by assets under management, AGG tracks the Barclays Aggregate U.S. Bond Index, which captures the entire U.S. bond market, including U.S. Treasury Bonds, corporate bonds, and municipal bonds of all duration (short-, mid-, and long-term maturities). The expense ratio for AGG is 0.05%.
Investors should keep in mind that the biggest ETFs by assets are not always the best ETFs to buy. However, high assets under management almost always translate to high trading volume, high shareholder confidence, low expense ratios, and a long history since inception. All of these qualities can combine to make the best ETFs.