Do you know what’s hid­ing in your ETF?

The Denver Post - - BUSINESS -

While large in­dex-based funds, such as those that track the Stan­dard & Poor’s 500, may fairly rep­re­sent the in­dex’s stocks, smaller niche ex­change-traded funds don’t al­ways de­liver strictly what their names prom­ise, and you might wind up in­di­rectly buy­ing a lot of some­thing you didn’t re­ally want.

This doesn’t mean you should avoid ETFS en­tirely. But if a tightly fo­cused in­vest­ment is what you’re af­ter, you have to know what’s in your fund.

If you want to fig­ure out what’s re­ally in an ETF, you’ll have to dig be­yond its name.

What’s go­ing on?

The more money an ETF has, the more it will be forced to chase larger com­pa­nies, since these stocks can more eas­ily ab­sorb the dol­lars flow­ing in. But there’s a lim­ited se­lec­tion of large, liq­uid com­pa­nies. And, these com­pa­nies tend to op­er­ate glob­ally, so only small per­cent­ages of their rev­enue come from any one coun­try. It ends up be­ing hard for an ETF to get “pure” ex­po­sure to, say, Spain or the U.K.

What can in­vestors do?

You can find out much of what a fund does own, be­cause each ETF de­tails its top 10 stakes, in­clud­ing names and po­si­tion sizes.

But you’ll have to dig deeper — into the EDGAR data­base on the Se­cu­ri­ties and Ex­change Com­mis­sion web­site, for ex­am­ple — if you want to de­ter­mine how much busi­ness a com­pany does in a cer­tain niche. That de­feats much of the pur­pose of this kind of ETF: speed and sim­plic­ity.

With so many funds in­vest­ing in the same large com­pa­nies, you might end up with a big­ger al­lo­ca­tion to one com­pany than you want. So if you’re look­ing to ETFS for di­ver­si­fi­ca­tion — or for a pre­cisely tar­geted in­vest­ment — read the fine print first.

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