(MoneyWatch) Exchange-traded funds have certainly been hot, and the five hottest since their inception tell us a lot about investor behavior. Let's take a look at the largest five, according to Index Universe.
1. SPDR S&P500 (SPY). The S&P 500 fund was the first index fund ever launched, so it might not come a as shocker that this State Street fund launched in 1993 is the industry leader, at $98.83 billion in assets and with an expense ratio of .09 percent. Since it misses out on mid- and small-cap stocks and must trade based on the actions of the Standard & Poor's committee, it is an illogical choice for investors but gives evidence to the power of inertia.
2. SPDR Gold (GLD). This State Street fund owns gold and comes in at $73.93 billion in assets with an expense ratio of 0.40 percent. The success of this fund is due to speculators coming in as a convenient way to own the hot metal. While I don't know what the price of gold will be in a couple of years, chasing performance has never been a great way to build wealth.
3. Vanguard MSCI Emerging Markets (VWO). This $54.96 billion Vanguard fund owns emerging market stocks and has an expense ratio of 0.20 percent. It's been growing more rapidly than the iShares counterpart due to its lower expenses. In my view, the success of this fund is due to investor misconception that faster growing countries translate to faster growing stock markets. Also, this fund will be changing indexes next year from MSCI to FTSE, and Korea will no longer be included.
4. iShares MSCI Emerging Markets (EEM). This $38.19 billion iShares fund follows the same index as the Vanguard fund above (for now) but has an expense ratio of 0.67 percent. This has grown for the same reason as the Vanguard emerging markets fund.
5. iShares MSCI EAFE (EFA). This iShares fund owns equities in Europe, Australia, and the Far East (EAFE). It excludes emerging markets and Canada. It is to international investing what the S&P 500 is to U.S. markets -- a good start at indexing. But better funds exist today. Inertia is a powerful force.
I don't own a penny of these five funds because there are better choices available. Vanguard, iShares and Schwab have very low-cost broad ETFs that own the total U.S. and total international stock markets, along with the total bond market. That encompasses the four out of five of these top five ETFs. As for owning gold, I still have what I bought in the gold bubble of 1979, which taught me the valuable lesson of why performance-chasing doesn't work.