Knowing What's in Your ETF

Includes: EWP, EWU, EWZ
by: Tom Lydon

Investors have come to love ETFs for their ability to diversify a portfolio. However, some ETFs are more heavily weighted in sectors or companies than you might be comfortable with.

Broad-based ETFs that track major indexes, asset classes and subclasses will pretty much include a well-diversified set of holdings, remarks Dan Caplinger for The Motley Fool.

More specialized, niche ETFs tend to include fewer stocks among their holdings. The more specialized ETFs may often have a few different stocks heavily weighted within the fund’s portfolio, which may leave you more exposed than you may realize.

For instance, single-country ETFs have concentrated weightings largely because there aren’t enough big companies in most countries to provide a diversified portfolio. Some examples include:

  • iShares MSCI Spain ETF (NYSEARCA:EWP): Banco Santader (STD) makes up 22% of the ETF’s assets.
  • iShares MSCI Brazil ETF (NYSEARCA:EWZ): Petroleo Brasileiro (NYSE:PBR) and Vale (NYSE:VALE) account for around 40% of the fund’s assets.
  • iShares MSCI UK ETF (NYSEARCA:EWU): BP (NYSE:BP) is 14% of EWU’s assets.

This isn’t good or bad – it just is. You might be okay with a fund being 20% of a single stock; your next-door neighbor? Not so much.

It’s not necessarily a detrimental thing, either. Some single-country ETFs have been performing well directly as a result of high concentrations in a couple of stocks that did rather well. High concentration can be useful in a bull market.

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