Know Your ETF Holdings

Exchange traded funds provide investors with broad market exposure, but investors should still look under the hood or risk finding unwelcome surprises.

For instance, the Technology Select Sector SPDR (NYSEArca: XLK) is up 10% this year, whereas the First Trust DJ Internet Index Fund (NYSEArca: FDN) has gained nearly four times that.

FDN’s outperformance is attributed, in part, to its allocation to Amazon (NasdaqGS: AMZN), which is up 22% this year, and its lack of exposure to Apple (NasdaqGS: AAPL), which is down 8.0% year-to-date. XLK, on the other hand, has a 14% allocation toward AAPL. FDN has also gotten a boost from Facebook (NasdaqGS: FB) and Google (NasdaqGS: GOOG), among other Internet heavyweights.

If an investor is more comfortable with holding an all inclusive technology ETF but is concerned about heavy stock allocations, the Guggenheim S&P 500 Equal Weight Technology ETF (NYSEArca: RYT) equally weights holdings, so AAPL makes up about 1.6% of the fund. RYT has gained 26% so far this year. [What an Equal-Weight S&P 500 ETF Brings to the Table]

Investors should understand that most capitalization-weighted ETFs overweight exposure in stocks based on the firm’s market capitalization, so larger companies get a larger weighting. [Understanding ETF Portfolio Indexing]