When exchange-traded funds first hit the market, they were almost exclusively used to track indices such as the S&P 500.
With an ever-increasing demand for these baskets of securities that trade like stocks, ETFs have branched out to follow various sectors of business.
To identify the most-diversified ETFs, as measured by full exposure to all major sectors, TheStreet.com Ratings selected the funds reporting holdings in each of the following 12 sectors: basic materials, capital goods, communications services, consumer cyclicals, consumer staples, energy, finance, health care, technology, transportation, utilities and miscellaneous.
To ensure that a sufficient critical mass for influencing performance was present in each area, a minimum of 2% of assets had to be held in each sector.The 10 ETFs passing the tests are listed in the table below. For each, the sector with the heaviest representation in the ETF's portfolio is listed, along with the fund's lightest sector holding. In addition, the standard deviation of each fund's array of sector holding percentages is displayed. This is a measure of how close together the fund's percentage holdings of the 12 individual sectors are. A low standard deviation means that the ETF is more evenly divided among individual sectors than a fund with a higher standard deviation is. Thus, a low standard deviation of sector percentage holdings can be interpreted as an indication of less portfolio concentration and greater diversification. Finally, the 12-month total-return performances and TheStreet.com Ratings grades for the ETFs are listed, in the below chart.
|The Most-Diversified ETFs
|Name and Ticker Symbol||Heaviest Sector & Percentage||Lightest Sector & Percentage||Standard Deviation (%)||12-Mo. Total Return (%)||TSC RATINGS GRADE|
|DOMESTIC SMALL-CAP FUNDS|
|iShares Russell 2000 (IWM)||Finance: 24.42%||Transportation: 2.47%||6.59||18.26||D-|
|iShares S&P Small Cap 600 (IJR)||Finance: 18.90%||Communic. Svcs.: 2.70%||5.34||15.08||D|
|Vanguard Small Cap ETF (VB)||Finance: 25.13%||Miscellaneous: 2.42%||6.53||15.78||B-|
|Vanguard Small Cap Value ETF (VBR)||Finance: 25.13%||Miscellaneous: 2.42%||6.53||19.54||B+|
|DOMESTIC MID-CAP FUNDS|
|iShares Morningstar Mid Core (JKG)||Finance: 25.96%||Transportation: 2.04%||7.72||14.22||B|
|iShares Russell Mid Cap Growth (IWP)||Cons. Cyclicals: 18.75%||Miscellaneous: 2.44%||5.88||10.51||C+|
|Vanguard Extended Market ETF (VXF)||Finance: 26.15%||Miscellaneous: 2.00%||6.63||14.38||C+|
|DOMESTIC LARGE-CAP FUND|
|SPDR 500 (SPY)||Finance: 23.96%||Transportation: 2.03%||6.18||15.81||C+|
|GLOBAL FUND (U.S. & INT'L STOCKS)|
|iShares S&P Global 100 (IOO)||Finance: 16.76%||Communic. Svcs.: 2.53%||4.04||19.90||C+|
|INTERNATIONAL FUND (NON-U.S. STOCKS)|
|streetTracks Dow Jones Stoxx 50 (FEU)||Miscellaneous: 18.21%||Energy: 2.19%||6.02||26.67||B-|
|Data as of 12/31/2006.
Source: TheStreet.com Ratings