Exchange traded funds continue to increase in number and popularity, growing to one of the most commonly traded securities on the stock exchange as both institutional and the average retail investor gain greater access to broad or specialized market exposure. Yet many individuals are unfamiliar with ETFs’ inner workings. In this ongoing series, we hope to address your questions and help shed light on the investment vehicle. [What is an ETF? — Part 4: In-Kind Creations and Redemptions]
With over 1,400 exchange traded products on the market, it is not surprising that fund providers have similar products that cover the same segment of the market. However, every fund is different, and investors should be aware that ETFs with similar monikers don’t always trade alike.
Information on ETFs is readily available to any investor. Given the ETFs’ highly transparent nature, specific fund holdings and allocations are outlined on each ETF providers websites.
Fund providers usually use a sampling technique to determine an ETF’s holdings. Instead of perfectly replicating an ETF’s underlying benchmark index, the fund will hold a fraction of securities found within the original index. This is mainly determined by individualistic management styles and preferences.
For instance, the iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM) and Vanguard MSCI Emerging Markets ETF (NYSEArca: VWO) both track the MSCI Emerging Markets Index. However, EEM has gained 13.07% year-to-date, whereas VWO has increased 13.36% year-to-date. Over the past 5-years, EEM is up 3.73% and VWO is 4.44% higher.
Among other things, holdings play a large role in the funds’ performances. Slight variations may cause funds to exhibit diverging performances.