What is an ETF? — Part 5: Know Your Holdings

March 30th at 8:32am by Tom Lydon

Exchange traded funds continue to increase in number and popularity, growing to one of the most commonly traded securities on the stock exchange as both institutional and the average retail investor gain greater access to broad or specialized market exposure. Yet many individuals are unfamiliar with ETFs’ inner workings. In this ongoing series, we hope to address your questions and help shed light on the investment vehicle. [What is an ETF? — Part 4: In-Kind Creations and Redemptions]

With over 1,400 exchange traded products on the market, it is not surprising that fund providers have similar products that cover the same segment of the market. However, every fund is different, and investors should be aware that ETFs with similar monikers don’t always trade alike.

Information on ETFs is readily available to any investor. Given the ETFs’ highly transparent nature, specific fund holdings and allocations are outlined on each ETF providers websites.

Fund providers usually use a sampling technique to determine an ETF’s holdings. Instead of perfectly replicating an ETF’s underlying benchmark index, the fund will hold a fraction of securities found within the original index. This is mainly determined by individualistic management styles and preferences.

For instance, the iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM) and Vanguard MSCI Emerging Markets ETF (NYSEArca: VWO) both track the MSCI Emerging Markets Index. However, EEM has gained 13.07% year-to-date, whereas VWO has increased 13.36% year-to-date. Over the past 5-years, EEM is up 3.73% and VWO is 4.44% higher.

Among other things, holdings play a large role in the funds’ performances. Slight variations may cause funds to exhibit diverging performances.

The iShares EEM ETF includes 836 holdings; Samsung Electronics, Gazprom and Chinmobile are the top three allocations; and its top ten holdings account for about 16% of the overall fund. Top country allocations include China 16.7%, South Korea 15.0%, Brazil 15.0%, Taiwan 11.1%, South Africa 7.5%, Russia 6.7%, India 6.4%, Mexico 4.6%, Malaysia 3.3% and Indonesia 2.7%.

In comparison, the Vanguard VWO ETF has 907 holdings; Samsung Electronics, Petroleo Brasileiro and Vale are the top three allocations; and its top ten securities make up 18.9% of the fund. Top country allocations include China 17.6%, Brazil 16.3%, South Korea 13.7%, Taiwan 11.2%, South Africa 7.5%, Russia 7.4%, India 7.2%, Mexico 4.6%, Malaysia 3.0% and Indonesia 2.3%.

The differences between company, country or sector weightings don’t make one ETF better than another. It is a question of what works better within your overall portfolio and what you are more comfortable with. Potential investors should take the time to examine holdings, stricture and goals of any ETF investment for the time frame you have in mind.

For more stories in the series, visit our “What is an ETF?” category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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