Examine ETF holdings closely

ETF shares

ETF investors should examine what is in each fund to avoid concentrations of shares with other directly or indirectly held investments.

Exchange-traded fund (ETF) investors should be examining whether a fund is true to label, as well as the underlying holding of shares, to avoid inadvertent concentration around single stocks within their portfolios, according to an international ETF investment manager.

Global X head of distribution Kanish Chugh said thematic ETFs that are based on a specific area, such as energy or robotics, instead of an index, may not always be a ‘pure play’ within that thematic range.

“If you look at some of these thematic ETFs, such as robotics for instance, do they actually align to an underlying portfolio of robotic stocks?” Chugh told smstrusteenews at a recent media briefing.

“If you do a deep dive into something, pick a portfolio and try to identify the theme that that portfolio is representing. If you can’t, either it’s not complete as a theme or it’s not related at all to that theme.”

He illustrated the principle of being true to label sharing the experience of Global X’s digital payments ETF in the United States last year that considered, but rejected, the inclusion of Apple and Facebook.

“Those companies were considered because they operate with digital payments, but is that a major source of revenue for them? No, it’s not and we want to be pure play and best of breed in our thematic ETFs,” he said.

Chugh pointed out this insight is important for investors to prevent concentration around stocks held directly or in other ETFs as it was not uncommon for this concentration to occur.

“Sometimes when investors choose the big, broad, multi-asset ETFs or those funds with broader exposures where they may not know every name in an index, there may be crossover and, as a product provider, we need to provide more content, education and insights around the market,” he warned.

“We are seeing more investor awareness, so obviously they are doing their research trying to understand what’s in the ETF portfolios.”

Global X head of investment strategy Blair Hannon said examining the underlying shares of an ETF portfolio has led to the growth of thematic funds as investors have become comfortable with their structure and investment outcomes but suggested it should not breed complacency.

“This does not mean anyone should walk away from understanding the fund and investors need to do their due diligence and research to see if it will help them achieve the outcome they want,” Hannon noted.

“You would do that with a normal ETF and should do that with a thematic ETF because overlap can be a problem. Why buy an index ETF and a thematic ETF and have the same stocks in the top 10?” he asked.


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