Exchange traded funds’ names can be misleading. Many have names that suggest that they make certain types of investments when, in fact, they contain only a nominal amount of such investments. Examples provided by the Wall Street Journal include a an ETF called “Middle East & Africa” that invests only 5% of its funds in the Middle East, a Brazil-Russia-India-China (“BRIC”) fund with only 2% invested in Russian companies, and a fund with the name “homebuilders” with a mere 26% of its assets invested in homebuilders (“What’s in a Name? When It Comes to ETFs, Sometimes Not a Whole Lot”).
One exchange traded fund sponsor, State Street Global Advisors, is reportedly even telling its customers that “many ETFs belie their name,” and that “it’s necessary to look beyond the fund’s name or the index it tracks.”
Some commodities exchange traded funds provide another example of how investors can be misled by a name. The $1.4 billion U.S. Oil fund is linked to oil futures, as a result of which the fund’s share price does not track “spot” oil prices, as the name may imply. When spot oil prices doubled in 2009, the U.S. Oil fund returned only 19%.
The article also notes that the Guggenheim Frontier Markets fund invests mostly in Chile, Colombia, Peru and Egypt. But those countries are generally categorized as “emerging” economies rather than “frontier” economies, which are considered to be in earlier stages of development.
Morningstar has reportedly criticized the Guggenheim BRIC fund for having only 2% of its assets invested in Russia, while BlackRock’s iShares MSCI Emerging Markets Eastern Europe Index is, according to the Wall Street Journal, 73% invested in Russia ? not eastern Europe.
Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.