ETF Nerd Digs Into Diversification

By Toroso Asset Management

In December of 2017, we introduced the ETF Nerd with our focus on the concentration of the ETF industry. The primary formula used to evaluate concentration is the Herfindahl-Hirschman Index (HHI), which was originally designed to help with anti-trust legislation by quantifying market share within an industry.

The TETF Index team is continually researching better ways to compare ETFs while embracing the transparency client alignment growth factor. With that in mind, we propose a new way to view the concentration and diversification of equity ETFs. Our ETF Think Tank team is eager to hear the feedback from other ETF Nerds.

ETF Nerd Digs Into Diversification

We believe that ETF growth requires more education, and investors need more information than simply expense ratios and volume to decide which ETF to purchase. Diversification has been one of the primary attributes of ETF investing but quantifying how diverse an index actually has been is quite difficult. We propose using HHI to rank the concentration of the holdings, sector, market cap, and top ten holdings. Get ready Nerds, here is our formula:

ETF Thinktank Diversification Calculator = ((HHIholdings * 100) + HHIsectors + HHImktcap +( top10 * 1000))/100

The idea is to allow investors to compare two ETFs and determine which is more diversified on multiple factors. See example below, the lower the score the more diversified: