Exchange traded funds (ETFs) are designed to be diverse in a particular industry or region, however, some of them are heavily invested in one or a few stocks. In some instances, a single stock can make up 20% or more of an ETFs holdings. Some advisors don’t think this is good because it can take away from the idea of an ETF offering diversification. In the near future this could become more of an issue as many ETFs are created to follow niche industries.  In this niche, one company may have a dominant role, as reported by Juan Carlos Arancibia of Investor’s Business Daily.

One example is iShares Dow Jones U.S. Energy Sector (IYE), it holds 24% Exxon Mobil (XOM) and 17% Chevron (CVX).  Many investors may not research what exactly an ETF holds, so it’s important to look up the holdings and understand what you are buying and how it fits in your portfolio.

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.