Market Overview

Diversity Matters...With ETFs (EWZ, XLP, SMH)


Diversity matters, but before emotions get charged up, let's be careful to note we're not talking about the politically sensitive type of diversity in this piece. We're talking ETF diversity, or in some cases, lack thereof.

Some ETFs are heavily exposed to a small number of stocks, in some cases one or two stocks dominate an entire ETF. That's not always a bad thing depending on the stock but it's not always a guarantee of great returns either.

The statistics highlight the fact that when it comes to ETFs, there is something to be said for a more balanced approach. That certainly explains why since 2003 the Rydex S&P 500 Equal-Weight ETF (NYSE: RSP) has almost doubled while the S&P 500 SPDR (NYSE: SPY) is up "just" 50%.

Here are some more ETFs with heavy concentrations to just a couple of stocks that are being outperformed by more diverse equivalents.

iShares MSCI Brazil Index Fund (NYSE: EWZ) The appearance of the iShares MSCI Brazil Index Fund on this list is no surprise because nearly everyone that knows anything about this ETF knows it's anything but diverse. Petrobras (NYSE: PBR), Brazil's state-run oil producer, and Vale (NYSE: VALE), the world's largest iron producer, combine for 30.3% of EWZ's weight.

That's all fine and dandy when those stocks are performing well. Problem is over the past year and two years, Petrobras has been a stinker. The unheralded First Trust Brazil AlphaDEX Fund (NYSE: FBZ) has been outpacing EWZ this year and a large part of the reason why is because no single stock accounts for more than 3.77% of FBZ's weight.

Energy Select Sector SPDR (NYSE: XLE) The Energy Select Sector SPDR is a great example of bigger not always being better when it comes to ETFs. It's also a great example of an ETF where the returns really lag those of an almost equal-weight counterpart. In this case that ETF is the SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP).

While Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) combine for almost a third of XLE's weight, XOP's holdings range in weights from 0.73% to 1.63%. XOP is up almost 10% year-to-date while XLE is up just 4%. Go figure.

Consumer Staples Select Sector SPDR (NYSE: XLP) Procter & Gamble (NYSE: PG) and Philip Morris (NYSE: PM) account for over 25% of XLP's weight, though that's not necessarily a complaint as the ETF has been a steady performer in 2012.

To this point, we've examined the performance of ETFs over shorter time horizons, but when it coms to staples stocks and ETFs, it's reasonable to assume these products are held for longer time frames by conservative investors. To that end, the Guggenheim S&P Equal Weight Consumer Staples ETF (NYSE: RHS) has outperformed XLP over the past two years and five years, though XLP is slightly ahead in 2012.

Market Vectors Semiconductor ETF (NYSE: SMH) Kudos to the Market Vectors Semiconductor ETF for being up 15% year-to-date at the start of trading today, a performance that is even better than Intel's (Nasdaq: INTC) and Intel accounts for 20% of SMH's weight. Throw in Taiwan Semiconductor (NYSE: TSM) at 12.6%, and we've got almost a third of SMH's weight allocated to just two stocks.

No single stock receives an allocation of more than 2.49% in the SPDR S&P Semiconductor ETF (NYSE: XSD), a fund that has slightly outperformed SMH year-to-date.

Posted-In: Long Ideas News Sector ETFs Short Ideas Specialty ETFs Emerging Market ETFs Commodities Intraday Update Best of Benzinga


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