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
Be aware that most of the time,
are the victims of their own underlying indexes and classification
methodologies, and those details can be missed if investors aren't
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
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
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
Similar to ARGT, FRN can only hold DRs, which significantly
reduces its ability to access local companies that don't have
listings on foreign exchanges.
The Guggenheim BRIC ETF (NYSEArca:EEB), like FRN and ARGT, also
tracks an underlying index of DRs. The problem here is that very
few Russian securities trade on foreign stock exchanges, which
translates to a mere 2.3 percent allocation to Russia-leaving out
the "R" out of BRIC.
The argument for DR-based indexes is that they provide some
liquidity advantages over their local-market counterparts since
they trade during U.S. market hours, as in the case of American
depository receipts (ADRs).
However, not all stocks are traded as DRs, so investors may not
receive the most representative market basket.
Aside from the prevalence of DR issues, I should also point out
an issue that comes up with the entire suite of sector SPDR funds,
including the SPDR S&P Homebuilders (NYSEArca:XHB); the SPDR
S&P Bank ETF (NYSEArca:KBE); as well as the SPDR S&P Metals
and Mining ETF (NYSEArca:XME).
These ETFs track equal-weighted indexes. But their names don't
reflect this, and at first blush they look like plain-vanilla
market-cap-weighted sector ETFs.
That matters because equal-weighted funds have smaller-cap
tilts, meaning investors that don't know what they're getting into
might be in for a bouncier ride than, say, a broader cap-weighted
ETF would deliver.
That said, the S&P indexes that these funds track don't have
"equal" in their names-so this ambiguity can be pinned on the index
provider as much as on the fund issuer.
Another area of the market that tends to have misleading names
is metals and mining ETFs. These types of funds don't replicate
their underlying index fully-only 80 to 90 percent has to be
invested in the underlying index.
Previously, I've written about this issue when I looked at the
presence of nongold miners in gold miners funds. For example, the
Market Vector Gold Miners ETF (NYSEArca:GDX) holds Silver Wheaton,
the world's largest silver-streaming company, in its top 10
None of these issues crosses any legal lines-the case of SPDR
equal-weighted sector funds being the perfect example-but there
just has to be a better way to notify investors from the
Don't judge a book by its cover. The names of some funds clearly
don't tell investors the whole story, so it's crucial to look at
how funds are structured and why.
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