Don’t Generalize and Get to Know Your ETFs

As the exchange traded fund universe expands, investors can now choose among multiple offerings for any given market or sector. Nevertheless, investors should look beyond an ETF’s appellation and delve into the strategy and holdings.

For instance, investors shouldn’t solely rely on the SPDR S&P Retail ETF (XRT) as guidance for consumer health, writes L.A. Little for Minyanville. [ETF Trading Basics]

Looking at the ETF’s underlying holdings, investors will notice that the ETF is mainly comprised of apparel goods and specialty stories like eateries and pawn shops, with almost 50% allocated in the two group.

XRT’s top holdings include Francesca’s Holdings Corporation (FRAN), Cabela’s Incorporated (CAB) and Abercrombie & Fitch (ANF).

Alternatively, the Consumer Discretionary Select Sector SPDR (XLY) has a large allocation toward media companies, followed by specialty retail. Again, the two sub-sectors make up about 50% of the fund’s overall weighting

XLY’s top holdings include Amazon (AMZN) 7.2%, Comcast Corp. (CMCSA) 6.9% and Walt Disney (DIS) 6.0%.

Additionally, the two ETFs have slightly different weighting methodologies. XRT follows a more equal-weight methodology that spreads out its allocation equally among component stocks, whereas XLY follows a more traditional capitalization-weighted methodology that leans toward larger companies. [What Are ‘Smart-Beta,’ Factor-Based Index ETFs?]

Investors should not generalize their ETF investments. Instead, people should take the time to do some due diligence before diving into any investment decision.

For more information on ETFs, visit our ETF 101 category.