The World's Most Misleading ETF Names

November 07, 2012

As an ETF analyst diving regularly into prospectuses to figure out how a fund truly works, I’m frankly surprised by how often what I expect to find is not what’s actually there.

Some of the ETF names I see have little to do with what the funds actually hold or how they are structured.

So, with that in mind, I thought I’d share a list of the more serious offenders.

Be aware that most of the time, ETFs are the victims of their own underlying indexes and classification methodologies, and those details can be missed if investors aren’t careful.

Let’s begin with the SPDR S&P Emerging Middle East & Africa ETF (NYSEArca: GAF), which allocates 90 percent of the portfolio to South Africa. The remainder is split between Egypt and Morocco. As such, GAF pretty much lacks the Middle Eastern exposure its name advertises.

The fund’s underlying benchmark, the S&P Mid-East and Africa BMI Index, doesn’t have any Middle Eastern countries that it classifies as “emerging.” Israel used to fit that bill before it was reclassified as “developed” in mid-2010, and removed from the “frontier” index.

Although GAF looks like a single-country South Africa fund now, this may change if S&P upgrades Qatar and Kuwait from frontier to emerging. Perhaps this will happen in the next few years, at which point the portfolio will look a lot more like its name suggests it should.

Until then, this Emerging Markets Middle East & Africa ETF provides zero exposure to the Middle East.

Meanwhile, the Global X FTSE Argentina 20 ETF (NYSEArca: ARGT) doesn’t target companies domiciled in Argentina. Instead, it tracks a benchmark of firms that “directly participate in the Argentine economy.”

In addition, only shares that are open to foreign ownership without any restrictions are eligible for inclusion, such as depository receipts (DRs) and non-Argentinean listed securities. As a result, firms that exclusively trade on local markets are excluded from the index.

In the end, only about 40 percent of the companies in the fund are domiciled in Argentina. The rest are split more or less evenly among companies based in North America and Europe. Its largest holding, at 18.9 percent, is Tenaris, a manufacturer of steel pipes, with a home office in, of all places, Luxembourg.

The Guggenheim Frontier Market ETF (NYSEArca: FRN) is another fund whose name doesn’t do justice to what’s under the hood.

FRN is a “frontier market” fund with an underlying index that follows BNY Mellon’s country classification framework. I used the quotation marks because BNY Mellon classifies Chile, Colombia, Egypt and Peru as frontier, even though these countries as classified as emerging by the biggest index providers of today, including MSCI, FTSE and S&P.

In all fairness, country classifications are still hotly debated in the world of indexing. But BNY Mellon’s classification definitely goes against the grain on this one.

This is a shame, especially since investors who hold FRN as well as an emerging market ETF from another issuer would most likely double-dip in the country exposures mentioned above, skewing risk and returns.



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