Broad or Narrow ETFs? | ETF Trends

Many exchange traded funds (ETFs) that look similar on the surface can have important differences. The HealthShares Composite ETF (HHQ) and the Vanguard Health Care Fund (VHT) is an example that Gary Gordon for ETF Expert uses. Both of these ETFs invest in the health care sector, so they should perform the same, right?

Not exactly. When investors start to look closer they can see the subtle differences that could explain the slight variations in performance. HHQ invests in 80 of the largest companies by market capitalization that are part of the HealthShares indexes, including Watson Pharmaceuticals (WPI) and Express Scripts (ESRX). VHT invests in 264 large health care companies nationwide such as Pfizer (PFE) and Johnson & Johnson (JNJ). VHT also has a lower expense ratio at 0.25%, where HHQ is 0.75%. What these differences boil down to is that VHT is a broad-based ETF, and HHQ is a narrow-based ETF. Investors’ individual financial goals will determine which ETF would work best for them.

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.