Look At Your ETF; It May Not Be What You Think It Is

In putting together model portfolios for my subscribers, I spend a lot of time digging into the details of the ETFs that ultimately make the cut. It's an absolutely necessary part of portfolio construction, because failure to do your due diligence can result in a portfolio that's not what you think it is. It can be overweight in certain sectors or styles or there may be significant overlap in holdings.

I started out my career working in the call center of a mutual fund company. I got to talk with a lot of people over time and it gave me some pretty interesting insights into the mind of the average investor. Most investors were performance chasers. They simply wanted to put their money into the best performing fund that year. People would frequently ask for "that 30% fund" or something like it. The lead-up to the tech bubble bursting was a particularly scary time watching unknowing investors piling their money into risky investments without having any idea of what they were buying (and thumbs down to the fund companies that shamelessly advertised huge returns in order to attract assets with little concern for the potential consequences).

I remember one lady calling in requesting information on our Growth & Income Fund, which happened to be a solid performer at the time. Then she added "and the Equity Income Fund for diversification." Her heart was in the right place, but she thought simply that more funds equaled more diversification. In reality, Growth & Income and Equity Income were virtually identical. They had the same portfolio manager. Eight of the top 10 holdings were the same. They both focused on large-caps. The only real difference was that Growth & Income was slightly more tilted towards growth, but there was significant overlap between the two portfolios and pairing them up offered almost zero additional diversification benefits.

This is just an example from 20 years ago, but it emphasizes the importance of knowing what you own and what you're buying. It's especially tricky nowadays with over 2,000 ETFs available to choose from.

Click the button below to read the rest of this original article on Seeking Alpha.

If you enjoyed reading this article, be sure to subscribe to the site and receive the ETF Focus Weekly newsletter absolutely FREE! Just check out the box below!

Become A GREAT Dividend Growth Investor!

Sign up to receive our FREE 6-part guide on how to pick the right stocks, invest with conviction and secure a stress-free retirement today!

    We won't send you spam. Unsubscribe at any time.