For all of us exchange traded funds (ETFs) enthusiasts, we like to think we have a firm understanding of them and their holdings. However, as the number of ETFs grows at an astonishing rate (there are 553 ETFs and ETNs on the market and 363 in registration, according to ETF Watch), tracking all the holdings and their percentages within the ETFs becomes a formidable challenge. We’re up to it though, right?
Not always. Matt Hougan of Index Universe created a fantastic, little pop quiz question: What is the weight of Apple Computer in the PowerShares QQQ (QQQQ)?
a. 2%
b. 4%
c. 6%
(Hum "Jeopardy" theme song.) The answer is: None of the above. Apple Computer makes up almost 10% of QQQQ, actually 9.5%. Shocked?
Because of the QQQQ’s unusual weighting system, Apple’s presence nearly doubles that of technology giant Microsoft, which is the second largest holding at 5.8%. Talk about serious pressure for the iPhone to perform!
The point is, this case example stresses why it pays (pun intended) to know what’s going on inside your ETFs.
Just for fun, can you name the five largest holdings in QQQQ? (Hint: You already know the top two.)