ETF Holdings, Performance, and Risk: Will Your ETF Be Next to Blow Up?

While cost and transparency advantages provided by exchange-traded funds (ETFs) get a lot of attention, the relatively high degree of company-concentration risk embedded in certain ETFs does not.

Certain ETFs that focus on narrower segments of the global market like specific countries, sectors, or industries use market capitalization-weighted indexes to select and weight stocks. This exposes these ETFs to a high degree of company-concentration risk.

Take a look at some iShares ETFs that have a meaningful chunk of their assets in their top holding:

iShares ETF Name (Ticker)

Top Holding

% ETF Invested

iShares DJ US Energy ETF (IYE)

Exxon Mobil

25.2%

iShares MSCI Belgium ETF (EWK)

Anheuser-Busch InBev

24.8%

iShares MSCI Spain ETF (EWP)

Banco Santander

23.8%

iShares MSCI Mexico ETF (EWW)

America Movil

23.1%

iShares DJ US Oil Services ETF (IEZ)

Schlumberger

22.3%

iShares MSCI Israel ETF (EIS)

Teva Pharmaceutical

21.6%

iShares MSCI Switzerland ETF (EWL)

Nestle

19.1%

iShares Peru ETF (EPU)

CDM Buenaventura

18.7%

iShares DJ US Telecom ETF (IYZ)

AT&T

18.6%

iShares MSCI South Korea ETF (EWY)

Samsung Electronics

18.0%

Source: iShares.com

ETF Performance: Why is company-concentration risk important?

In the past year alone, we have seen the demise or near demise of titans like American International Group (AIG), General Motors, and Lehman Brothers (LEHMQ.PK). Shareholders who have held on these shares have seen their entire investment evaporate in a trice.

Looking over a longer time-frame, shares of Pfizer (PFE) and Microsoft (MSFT) have been on a secular decline for nearly a decade as earnings growth has slowed or proved elusive. Pfizer and Microsoft shares are now down over 60% and 50% from their 1999 highs.

These anecdotes highlight that even large companies are not immune to company-specific risks. The underlying factors for such risks can range from management hubris to rising competition to changing industry landscape.

As such, an ETF that concentrates a high portion of its assets in the top holding exposes its investors to company-concentration risk.

So, what do you do if you own one of these iShares ETFs?

There is no need to panic and sell.

ETFs that have a high degree of company-concentration risk are in general aggressive ETFs such as country ETFs or sector ETFs. So, just make sure your overall portfolio is appropriately diversified so that it will not blow up even if a specific ETF does.

 

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