Investors Should Look Under the Hood of Their ETFs

In May 2016, VEA completed its transition to a new benchmark index – its previous index excluded exposure to Canada and small-caps. Now, VEA includes about 11% in small-caps and 8% in Canadian companies.

EEMO, which was previously known as the PowerShares S&P Emerging Markets High Beta Portfolio (NYSEArca: EEHB), now tracks the S&P Emerging Markets Momentum Index. The EEMO now favors companies with high forward price movements, compared to its previous screening process that targeted companies with high volatility. Consequently, the fund now includes greater exposure to South Africa and Taiwan, but it reduced exposure to China and Brazil.

“All of them had what we consider to be significant changes to the constituents,” Rosenbluth added. “While this may help future performance, looking backward is problematic.”

Investors looking to add an ETF to their portfolios should carefully look through underlying holdings and rely less on past performances as funds may change the makeup of their underlying portfolios.

For more information on ETFs, visit our ETF 101 category.