Investors have come to love exchange traded funds (ETFs) for its ability to diversify a portfolio. However, some ETFs are more heavily weighted in sectors or companies than you might be comfortable with.
Broad-based ETFs that track major indexes, asset classes and subclasses will pretty much include a well-diversified set of holdings, remarks Dan Caplinger for The Motley Fool.
More specialized, niche ETFs tend to include fewer stocks among their holdings. The more specialized ETFs may often have a few different stocks heavily weighted within the fund’s portfolio, which may leave you more exposed than you may realize. [How ETF Investors Can Put Risk Into Perspective.]
For instance, single-country ETFs have concentrated weightings largely because there aren’t enough big companies in most countries to provide a diversified portfolio. Some examples include:
- iShares MSCI Spain ETF (NYSEArca: EWP): Banco Santader (NYSE: STD) makes up 22% of the ETF’s assets.
- iShares MSCI Brazil ETF (NYSEArca: EWZ): Petroleo Brasileiro and Vale account for around 40% of the fund’s assets.
- iShares MSCI UK ETF (NYSEArca: EWU): BP (NYSE: BP) is 14% of EWU’s assets.
This isn’t good or bad – it just is. You might be okay with a fund being 20% of a single stock; your next-door neighbor? Not so much.
It’s not necessarily a detrimental thing, either. Some single-country ETFs have been performing well directly as a result of high concentrations in a couple of stocks that did rather well. High concentration can be useful in a bull market. [Where’s Your ETF Strategy?]
For more information on ETFs, visit our ETF 101 category.
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.