Look Before You Leap: Know the Holdings of Your ETFs | ETF Trends

Exchange traded funds (ETFs) offer exposure to a wide variety of areas of the markets, but, like a snow flake, each ETF is unique. Two similar-sounding ETFs can vary in their holdings, diversification and trading strategy. It’s a good idea to look before you leap.

ETFs are disparate in that they have different rules for re-balancing of holdings, discretion of holdings, focus, etc., and some are more liquid than others, writes Andrew Hart for ArticlesCollection. Recent changes in market capitalization have also affected weightings of holdings in the sector, too. [Four investing rules to follow.]

Hart has compiled a small sampling of the available financial sector ETFs and the diversification and top holdings of the funds to illustrate this point:

  • iShares Dow Jones U.S. Financial Sector (NYSEArca: IYF). Top 10 holdings are 37.9% of assets. Top three holdings: JPM 10%, WFC 5.58%, GS 4.28%.
  • iShares Dow Jones U.S. Financial Services (NYSEArca: IYG). Top 10 holdings are 57.7% of assets. Top three holdings: JPM 15.7%, WFC 8.76%, GS 6.72%.
  • iShares S&P Global Financials (NYSEArca: IXG). Top 10 holdings are 24.4% of assets. Top three holdings: JPM 4.3%, HSBC 4.25%, WFC 2.58%.
  • Financial Select Sector SPDR (NYSEArca: XLF). Top 10 holdings are 51.2% of assets. Top three holdings: JPM 12.34%, WFC 10.34%, BAC 5.45%.
  • Vanguard Financials ETF (NYSEArca: VFH). Top 10 holdings are 36.9% of assets. Top three holdings: JPM 8.2%, WFC 7.26%, BAC 5.02%.
  • Rydex S&P Equal Weight Financials (NYSEArca: RYF). Top 10 holdings are 17% of assets. Top three holdings: SLM 2.15%,MS 1.92%, FII 1.78%.
  • PowerShares FTSE RAFI Financials (NasdaqGM: PRFF). Top 10 holdings are 48.2% of assets. Top three holdings: JPM 11.15%, WFC 8.59% BRK/B 6.34%.
  • First Trust Financials AlphaDEX (NYSEArca: FXO). Top 10 holdings are 14.5% of assets. Top three holdings: WRB 1.85%, AWH 1.6%, PRE 1.47%.
  • PowerShares Dynamic Financials (NYSEArca: PFI). Top 10 holdings are 25.7% of assets. Top three holdings: AMP 3.12%, MET 2.85%, UNM 2.71%.

The sampling shows that ETFs like IYG, XLF, and PRFF have around 50% of holdings in their top 10 assets, which means diversification is a little lower. Furthermore, IYG has a large weighting in its top two securities and could be significantly swayed by those two companies alone. Then, there are those that have made an attempt at equal weighting, with the top holdings making up around 15% of assets.

The distribution of companies held within an ETF is not a question of right or wrong, but what works for you. Do you want a heavier weighting in the top securities? Or would you prefer more of an even distribution among all the components?

Price performance disparities in ETFs based on holdings and diversification may arise once the market settles and if arbitrage start to affect ETF prices. Investors should take the time to examine holdings, structure and goals of the ETF they are interested in for the time frame they have in mind. [(How to find out where an ETF’s holdings are based.]

For more on ETF investing, visit our ETF 101 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. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.