We have often stated that “ETFs are tools”, easily used and abused. Maybe we need a corollary to that axiom: ETFs are proxies. Indeed they are imperfect ones at best. Just as models are approximations of reality, so too are ETFs that seek to cover a certain market or sector. Some ETFs become so popular they become THE market in the minds of the investing public. Every ETF provider has to make certain trade-offs when it comes to designing an underlying index. These include number of holdings vs. market cap vs. liquidity vs. geography. The list goes on. In analyzing ETFs we have to recognize that these funds are at best approximations of the underlying exposures. In short, you need to look beyond the ETF name to the underlying holdings. In today’s screencast we look at ETFs as proxies, albeit imperfect ones.
Items mentioned in the above screencast:
A small-cap alternative to the popular Market Vectors Agribusiness ETF. (IndexUniverse)
Beware your Japan ETF exposure. (FT Alphaville)