ETF Holdings

By: EconomyWatch   Date: 3 August 2009

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ETF holdings comprise the underlying assets of the ETF that is in its portfolio. Most of the ETFs are in fact referred by the name of the holdings that they have. Each ETF gives more importance to one or more underlying asset than the other assets. A majority of the ETFs invest around 50% in their top 10% underlying assets to extract more profits.

The ETF holdings can differ from foreign exchange to equity. They are as follows:

  • Bonds

  • Commodities

  • Futures

  • Insurance

  • Real Estate

  • Stocks

  • Forex

ETF sponsors invest (in different proportion) on the various underlying assets and market the ETF as a bouquet of all those assets in the form of stocks. Thus, through ETF holdings, an ETF enjoys the features of mutual funds as well as stocks.

All the ETFs are governed by different rules and strategies that the sponsors design. Some are more liquid than others and have different balancing strategies. Balancing strategies come handy when the focused assets do not perform well. ETF sponsors, in such cases, redistribute the funds in such a way that the losses are hedged and minimized.

 

Diversification and ETF Holdings

 

ETFs, besides being a source of good income, are also a good way of diversifying a trader’s portfolio. With conservative investment strategies and timely tracking of indices, ETFs offer hedging against losses. However, all this could get negated if the ETF holdings are not diversified.

For traders looking to diversify their investments, it is important to inquire about the ETF holdings. If the holdings are not properly balanced, then real diversification is not achieved. In these times of financial uncertainties, when top companies are the worst effected, a portfolio with a more conservative approach towards profits will offer a comforting diversification than a ‘fast profit’ portfolio.

 

Though, it can be argued that investing more on the top holdings get more profits however for traders that invest in ETFs to achieve diversification, a big portfolio with a balanced investment is a must.

 

The key to success in ETF trading is to study the ETF holdings closely to know whether the structure and the goals of the ETF match with the traders’ objectives and expectations.


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