What stocks should you expect to find in a European ETF? How about a homebuilder ETF? While these questions should not be hard to answer, what’s inside an ETF might surprise you and your clients.
CFRA’s ETF research is based in part on the belief that an ETF is a basket of securities. So rather than judging an ETF using a rearview mirror approach, which can result in whiplash, we review the underlying holdings. The constituents of similar-sounding ETFs will be distinct, which impacts performance.
The WisdomTree Europe Hedged Equity Fund (HEDJ) is a great example. Despite outflows in 2016, the $9 billion ETF has generated strong investor interest in recent years. Some currency-hedged ETFs such as the iShares MSCI Eurozone (EZU) are explicit that they focus on companies domiciled in the European Monetary Union, such as Sanofi and Siemens. But HEDJ sounds like an ETF that might also have exposure to British American Tobacco or Nestle.
Yet HEDJ has no exposure to companies based in the United Kingdom or Switzerland, because it too focuses only on the eurozone. In contrast, the largest and fourth-largest countries for the peer ETF Deutsche X-trackers MSCI Europe Hedged Equity ETF (DBEU) are the U.K. and Switzerland.
What’s Inside Your European Equity ETF?
In 2016, HEDJ rose 9.9%, ahead of the 8.4% for DBEU. But we think this is not because HEDJ does a better job tracking its index, but rather, that the holdings are different.
Homebuilder ETFs More Than Homebuilders
Shifting to the U.S., both the SPDR S&P Homebuilders ETF (XHB) and the iShares US Home Construction ETF (ITB) have approximately $1.1 billion in assets and trade about 2 million shares on a daily basis. Yet despite XHB’s name, the ETF has just 30% of assets in homebuilder stocks, less than half the percentage that can be found in ITB.
While ITB has double-digit weightings in its two largest holdings, DR Horton and Lennar, XHB’s top positions include Whirlpool and Johnson Controls. CFRA agrees that strong housing demand will impact a variety of subindustries, such as household appliances and building products.
But in the past year, Whirlpool and Johnson Controls have performed much better in the past year than the above-mentioned homebuilders. Both ETFs are ranked as overweight by CFRA.
Tech With Your Telecom?
Looking for telecom exposure in an ETF? Better decide whether you want it mixed with technology, utilities or straight up.
The Vanguard Telecommunications Services (VOX) has hefty 20%-plus weightings in AT&T and Verizon and more moderate positions in CenturyLink, Level 3 Communications and T-Mobile USA, but no stocks in other sectors. In contrast, the SPDR S&P Telecom ETF (XTL) has approximately 60% in communications equipment companies such as Arista Networks and Palo Alta Networks, as well as equally weighted stakes in the above-mentioned telecom service providers.
Telecom Exposure in Sector ETFs
XTL outperformed VOX by more than 200 basis points in 2016, but underperformed by 400 basis points in 2015, a reminder that when the constituents are different, the records will also be.
Meanwhile, despite not including telecom in its name, the PowerShares S&P SmallCap Utilities Portfolio (PSCU) has nearly 40% in telecom companies such as Cincinnati Bell and Cogent Communications; and utilities ALLETE and South Jersey Industries.
CFRA highlighted these examples during its participation during “ETFs 101: Understanding & Evaluating ETFs” at Inside ETFs last week. To learn more about our ETF approach and see the methodology document, contact [email protected].
At the time of writing, neither the author nor his firm held any of the securities mentioned. Todd Rosenbluth is director of ETF and mutual fund research at CFRA, an independent research firm that acquired S&P Global Market Intelligence's equity and fund business in October 2016. He can be reached at [email protected]. Follow him at @ToddCFRA