Exchange traded funds allow anyone to gain exposure to broad or specialized segments of the market. The investment vehicle provides diversified exposure to assets, but it is still important to know what an investor is holding.
“While investors have an increasing number of tools to help them sort through the ETF universe, we are pleased that many of them agree with CFRA that what’s inside matters a lot,” Todd Rosenbluth, Director of ETF Research of CFRA and BETH PISKORA and Senior Content Director at CFRA, said in a note.
According to a recent survey, CFRA found that 59% of investors purchased a smart-beta ETF in 2016, with 97% saying they plan to maintain or add to smart-beta ETF positions in 2017, compared to 57% last year.
Moreover, CFRA discovered that investors are increasingly scrutinizing their ETF investments beyond a simple assessment of past performance to also incorporate an analysis of costs, risks and the likely future prospects of individual holdings, Rosenbluth said.
According to a Brown Brothers Harriman/ETF.com survey, among the biggest deciding factors when selecting an ETF, 38% of respondents pointed to the “exact exposure of the underlying index,” followed by 25% looking to the expense ratio. About 11% said historical performance was the most important deciding factor, followed by 8% tracking error and 4% for both tax efficiency and trading spreads.
Once popular currency-hedged ETF strategies have been losing their appeal this year. In 2015, 46% of surveyed respondents reported making a currency-hedged purchase, whereas 37% of respondents said they made a similar purchase over the first 11 months of 2016 and only 31% indicate they are likely to purchase such a strategy in the next 12 months.
On the other hand, minimum volatility strategies have been on fire. However, while the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) and the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV) have been go-to picks for low-vole exposure, CFRA reminds investors that it is important to look at what’s inside.
“Due to different methodologies, USMV has more exposure to information technology stocks and less exposure to consumer staples stocks than SPLV,” Rossenbluth added. “USMV holds almost 200 stocks, and the top 10 comprise about 15% of the assets. Meanwhile, SPLV holds only 100 stocks and the top 10 make up about 12% of assets.”
As with other ETFs that have similar names or track similar industries, investors should carefully look through the underlying holdings as component weights and sector tilts may drastically vary.
For more information on ETFs, visit our ETF 101 category.