An important part of using narrow based ETFs, like sector, country or thematic, is knowing at least a little about any very large holdings in the ETF. I recently wrote about the new iShares Denmark (BATS:EDEN) which has about 20% in client holding Novo Nordisk (NYSE:NVO). This is common in niche ETFs. The Global X Lithium ETF (NYSEARCA:LIT) has a similar weighting in Chilean based SQM.
This is neither bad nor good, it just is. If for some reason you like lithium but hate SQM then you probably need to find another way in besides the ETF. It is important to remember the ETF is simply one form of access to whatever narrow exposure you are interested in adding. It will have pluses and minuses to consider before buying.
Long time readers may recall we use the iShares DJ Tech ETF (NYSEARCA:IYW) for most of our technology sector exposure. IYW has an 18.5% weight to Apple (NASDAQ:AAPL) which is large and makes keeping some sort of tabs on the name prudent. The extent to which one keeps tabs is up to the end user and fortunately in this case you don't really need to go looking for information on Apple. CNBC talks about multiple times a day and there is plenty of coverage of the name on just about any market-related website you are likely to visit.
Tech makes up just under 20% of the SPX. Someone with an equal weight position in IYW obviously has a 3.7% weight in AAPL (actually the weight of AAPL in iShares S&P 500 (NYSEARCA:IVV) is 3.74% but you get the idea). To my way of thinking this is no different than owning AAPL directly in conjunction with some broad tech ETF that somehow did not have AAPL in it.
We target most individual equity positions at 2% or 3% of the equity portfolio so the equalweight in IYW (we do not target 20% in IYW) results in a pretty large position in AAPL-- at least from my perspective and I would say that even someone who does not use any individual stock does need to stay on top of the stock. Hopefully it is clear that if AAPL somehow cut in half due to some bottom up reason (not a prediction, but instead an observation of risk) then obviously the hit to IYW would be noticeable.
Again this is neither generically good or generically bad it is simply a consideration for using a narrow ETF and obviously I don't view it as a problem as we use the fund for many accounts.