Why Investors Need to Do Their Homework with ETFS

Exchange Traded Funds (ETFs) are investment vehicles many competent investors look to when assessing how to diversify their holdings for a long-term investment horizon. What has become apparent, and what many analysts are now discussing, is how some ETFs may actually be contributing to a lack of investment diversity due to the fact that some ETFs now have a small number of holdings incorporating a large percentage of the sectors many investors are looking to gain exposure to via ETFS today.

While it is true that some ETFs do have a small number of holdings represent the vast majority of ETF holdings (see technology ETFs), it is also true that in general ETFs tend to represent the overall sector an investor is looking for exposure to.

Technology ETFs, however, have been notoriously bad for investors seeking diversification, as some such ETFs now hold more than 50% of its holdings in a handful or less of companies, something investors seeking diversification seek to avoid.

It is important for active investors to consider how they incorporate ETFs into their overall portfolio in today’s current slow-growth economic environment.

With a small percentage of companies now making up a significant percentage of specific sector earnings, it can in fact be the case that buying into an ETF can in fact provide an investor with increased risk to a small number of firms, something that many investors would not have initially considered when buying a technology ETF.

In other words, "buyer beware" remains the going concern among ETF investors, especially in sectors controlled by a small number of firms, such as in the technology world.

Invest Wisely, my friends.