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]