The liquidity composition of a fund’s underlying assets, the historical tracking error and fees are important characteristics to consider when investing in an ETF.
ETFs are one of the fastest-growing investment vehicles, with total assets reaching $1.4 trillion in 2012 (Figure 1). Like open-end mutual funds, exchange-traded funds typically hold a basket of underlying securities. The basket can consist of stocks, bonds, futures, options, forwards (a non-publicly traded contract to deliver a cash commodity at a specified date in the future), the rights to physical commodities, or any combination thereof.
Figure 1. U.S. ETP Assets & Number of ETPs by Year