Here’s why I believe it’s so important for investors to take a look under the hood to understand exactly which companies are held in an ETF they may be considering, and in what quantities.
This can happen for various reasons. For example, common terminology such as “large cap” can be used to determine the companies which can be held by an ETF, and while this distinction is universal, the boundaries which separate mid cap from large cap can differ across funds.
Similarly, how a fund may determine that a group of stocks represent “value” may differ significantly from the methodology of another similar ETF. In finance, ubiquitous terms are often used, which often remain broad enough to invite a host of differing methodologies to stratify stocks based on certain criteria.
If you’re finding that the ETF you’re considering is top-heavy (i.e. too few stocks holding too much allocation in a fund), it may be best to look for other more diversified options. After all, you’re buying an ETF for the low-cost diversification these products get you, and if you wanted exposure to a group of five stocks, for example, you’d just buy those individual holdings on your own.