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Jan 14, 2020

Being financially savvy is important these days, and ETFs have been around for a while. But what are they? And what do they have to do with crypto and blockchain? Tune in and listen to me, Aviva Õunap and writer Ben Jessel explain what ETFs are and what they do, and how it may impact you and investments in the future.

One thing is that during this podcast we mention two of the more popular indices, the S&P 500 and the Russell 2000, and I wanted to put more information here for you to read so that you would be able to look anyone in the eye as they talked about ETPs and indices. Thank you, Investopedia!

The Standard & Poor's 500 (S&P 500) is a market-capitalization, weighted index of some of the largest publicly traded U.S. corporations. Most analysts see the S&P 500 as the best indicator of the U.S. equity market. This index is a commonly used benchmark for many portfolio managers, mutual funds, and exchange-traded funds.

The three most commonly traded ETFs that track the performance of the S&P 500 index include:
1. State Street’s SPDR S&P 500 ETF Trust (SPY)
2. BlackRock’s iShares Core S&P 500 ETF (IVV)
3. Vanguard’s S&P 500 ETF (VOO)

The common theme between all three funds is, of course, the index they track—the S&P 500. Many investors consider this index to be the pulse of the U.S. equity market. It is calculated using the market capitalizations of the 500 largest U.S. companies with stocks listed on the New York Stock Exchange (NYSE) or the Nasdaq Stock Market. Index constituents are selected by a committee, which takes into account criteria such as market capitalization, liquidity, financial viability, length of trading, and other factors.

On the opposite side of the spectrum is the Russell 2000 Index that follows the performance of around 2,000 U.S. small-cap firms. Like the S&P, the index is weighted and regularly serves as a benchmark index.

As the name suggests, Russell 2000 ETFs closely track the Russell 2000 Index, which combines 2000 of the small-cap companies in the Russell universe of 3000 stocks. The Russell 3000 tracks nearly 98% of all publicly traded U.S. stocks.

Both the S&P 500 and Russell 2000 indexes are market-capitalization-weighted. Unlike the S&P 500 index, however, the securities in the Russell 2000 index are not selected by a committee, but rather through a formula based on their market cap and current index membership.

The most notable ETFs tracking the Russell 2000 index, in the order of their significance, are:
1. BlackRock’s iShares Russell 2000 ETF (IWM)
2. Vanguard’s Russell 2000 ETF (VTWO)
3. Direxion Daily Small Cap Bill 3x Shares (TNA)

Russell 2000 ETFs may look more attractive than S&P 500 ETFs at the start of a bull market. The Russell 2000 constituents on average are bound to outperform their big brothers in the S&P 500 Index if the uptrend continues. The challenge is the volatility of their returns. So, as an investor, you may be in for a rough ride.

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