Not All ETFs Are Traded Equally

August 15, 2009

As exchange-traded funds represent a larger share of equity trading volume, many investors wonder if trading is concentrated in just a few funds.


ETFs can be effective tools for long-term investors interested in gaining access to the entire market or parts of it, or in using them for tactical asset allocation strategies. Another major attraction is that ETFs trade on an exchange, which allows investors easy access to best-in-class indexing, purchased and sold through a brokerage account. Traditional mutual funds must be purchased from a fund provider or through a mutual fund supermarket. ETFs are also very popular with institutional investors and traders focused on shorter-term exposures.

Here we examine the dollars traded in the ETF marketplace, focusing on the highest dollar-traded ETFs. We find, perhaps not surprisingly, that trading volume has in large part been driven by a narrow selection of ETFs.

In Figure 1 we look at the overall increase in the volume, in dollars traded, for ETFs as a percentage of all equity trades from February 2004 through June 2009. Over this period, monthly trading volume for stocks increased from $2.0 trillion to $8.0 trillion in October 2008, and was above $4.7 trillion in June 2009. During the same time period, ETF trading volume increased at a much faster rate, jumping from $142 billion in early 2004 to $3 trillion in October 2008, and was around $1.4 trillion in June 2009. This significant growth has made ETFs roughly 30% of all equity trading volume, in terms of dollars traded, a much larger portion than the 7% they represented in 2004. The increase in volume coincided with a significant expansion in ETF offerings, which grew from 151 U.S.-listed ETFs in early 2004 to almost 850 by the end of June 2009, and their increased acceptance and popularity.1


Figure 1. ETF Trading Volume


Note: Stocks are represented by both listed and over-the-counter trading volume.

Sources: NYSE Arca ( and Morningstar


We investigated further to see what has driven the growth in ETF trading volume more recently, focusing on the period since January 2008. While the growth in ETF trading volume has coincided with the growth in the sheer number of ETF offerings, the top 20 most heavily traded ETFs by dollar volume, on average, accounted for almost 80% of all ETF trading. It is apparent that market participants have focused on a few ETFs, despite having many available options. In Figure 2, we provide a breakdown of the average daily trading volumes, which highlights the role of the 20 highest-volume ETFs in overall trading volume.



Figure 2. Average Daily ETF Trading Volume


Note: Daily trading volume is calculated by dividing the total dollar amount traded in a given month by the number of trading days in that month.

Source: NYSE Arca (


At the top of this list are some of the most established ETFs with the most assets, which are popular with many different types of investors, especially institutional investors. These include four ETFs that account for about 50% of all ETF trading volume, on average, and are designed to track some of the most common, broad-based domestic indexes—the S&P 500 (SPDR S&P 500); the Nasdaq 100 (PowerShares QQQ); the Russell 2000 (iShares Russell 2000 Index); and the Dow Jones Industrial Average (DIAMONDS Trust, Series 1). These products are primarily used to gain “beta” exposure to broad indexes; the SPDR S&P 500 leads the way, singlehandedly accounting for roughly 35% of all ETF trading volume.


Included on this list are a group of nine more narrowly focused sector and subsector ETFs that track financial services, energy, gold, and real estate investment trust (REIT) indexes, which have been very volatile in recent months, as well as international and emerging markets ETFs, some of which are focused on a particular country. (See Figure 3 for a list of the ETFs in this category.) These nine ETFs on our top 20 list represent roughly 16% of ETF trading volume. These and similar ETFs offer easy access to specific areas of the investable markets, making them helpful tools for implementing various strategies.


Figure 3. Average Daily Turnover Rate Of The 20 Most-Traded ETFs By Dollar Volume


Note: Average daily turnover rate is calculated by dividing the average daily dollar volume in a given month by the month-end total net assets. Data is from January 2008 through June 2009.

Sources: NYSE Arca ( and Morningstar




Rounding out the top 20 is a set of seven ETFs aimed at producing multiples or inverse returns of the broad market or sector ETFs. Leveraged and inverse ETFs are newer products that were first issued in 2006. These investments provide a multiple of 2x or 3x the exposure to the markets, or a hedge against downturns in the markets, respectively. They are generally designed for investors interested in capitalizing on short-term market movements. With the volatility we saw in 2008, it is perhaps unsurprising that these types of products have become very popular.


Leveraged and inverse ETFs are complex financial instruments that are typically designed to achieve their stated objectives on a daily basis. Due to the effects of compounding, their performance over longer periods of time can differ significantly from their stated daily objective. Therefore, inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.


The data show that there are significant differences in ETF trading, which can be observed by looking at the average daily turnover rates in Figure 3. On average, ETFs trade daily at a rate of 8% of their monthly assets, with close to 80% of all ETFs having a daily trading volume below 5% of assets. However, what is very noticeable is that the most heavily traded ETFs, in general, trade at a much higher turnover rate. ETFs focused on the more volatile sectors, such as financials and energy, have been traded at daily turnover rates averaging 45% and 40%, respectively. The SPDR S&P 500, the most heavily traded ETF, also traded at a high turnover rate, 43% on average. Interestingly, from January 2008 through June 2009, the SPDR S&P 500 traded within a somewhat tight turnover range of 30% to 55%, with the only exception being in the very volatile third quarter of 2008, when its average daily turnover ratio reached 64%.

The real standouts in terms of turnover, however, are the leveraged and inverse ETFs on the top 20 list. Because these are designed to return a multiple or an inverse of a market benchmark on a daily basis, their turnover rates—represented by their daily trading volumes divided by their relatively low assets under management—are staggering. The average daily turnover rates for these products have been in the range of 61% to 242%, with some inverse offerings trading at around 800% in volatile markets such as we experienced in October 2008 and February 2009. This is not to be unexpected, as sophisticated investors know that to capture the performance results they need to sell or trade every day.2 Compared with their single-beta ETF counterparts, leveraged ETFs on our top 20 list traded at an average daily turnover rate that was 1.4 to 3.0 times higher, while the inverse ETFs traded at a rate that was 2.5 to 5.4 times higher.

The growth in the number of ETF offerings has clearly coincided with an increase in the dollar volume traded, especially as a percentage of all equity trading. The figures for the overall ETF landscape are skewed by a few core ETFs, which track broad-based domestic indexes and account for the majority of the trade volume and turnover, but the dollars traded in these ETFs have not grown as fast as ETF volume overall. With the launch of short-term-focused leveraged and inverse ETFs, large or sophisticated institutional investors now have a simple way to return a multiple of a particular market or to hedge against falling markets. These products have attracted significant assets over the past few years and account for a large part of the recent rapid growth of ETF trading. There are, however, many products being used for long-term, buy-and-hold, strategic positioning.



  1. The number of ETFs includes both exchange-traded funds and exchange-traded notes.
  2. See Philips (2009) for a more in-depth discussion of leveraged and inverse ETFs.



Philips, Christopher B., and Scott J. Donaldson, 2009. Research Note: Why Leveraged ETFs Can Pack a Surprise.
Valley Forge, Pa.: Vanguard Investment Counseling & Research, The Vanguard Group.

© 2009 The Vanguard Group, Inc. All rights reserved.



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