Exchange traded funds (ETFs) are known for their diversification among many other benefits. When selecting an ETF to cover a particular sector or region, investors need to ensure they understand the differences and similarities in ETFs that cover those areas. For example iShares S&P GSTI Software (IGV) and Software HOLDRs (SWH) both look as if they invest in software, right? While that’s true, SWH has returned an average annual gain of 12.5% over the past five years and 7% over the past three years, underperforming the market in both cases, says Selena Maranjian for The Motley Fool. IGV on the other hand, has gained an average of 16% over the past five years and 13.8% over the past three, topping the market by nearly 3% over five years.
What accounts for the vast differences in performance is each ETF’s holdings. When choosing an ETF, investors need to examine what the holdings are and how much they’re weighted to see if the ETF matches their investment goals. For example, SWH has 13 holdings with 22% going to Microsoft (MSFT). IGV spreads its assets over 40 holdings and 35% of the weight is divided among its top five.
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.