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You Need to Know What's in Your ETF

Stocks in this article: RYTXLKAMZNXLI

During the darkest days of the financial crisis, GE declined by 75%, contributing to a 54% drop in XLI, but RGI went down by only 38% in the same period. RGI was able to recover to its precrisis high in May 2011, whereas XLI got back to its high in March of this year.

The risks in GE because of its large exposure to the financial sector were well known before the crisis, as I wrote in 2006, and the decision to avoid the one stock made a meaningful impact on returns.

A large weighting in a single stock is not necessarily a bad thing. In the year leading up to Apple's high in September 2012, XLK was up 30% compared to 19% for RYT.

Many investors may not realize that this sort of specific portfolio strategy can be had investing in ETFs, and of course, it is not a prerequisite to successful implementation of an ETF portfolio.

But investors willing to commit the time to look under the hood at the holdings, sector weightings, country weightings or the weightings of any other characteristic in a given fund gives themselves an opportunity for a better long term result.

At the time of publication, Nusbaum had no positions in securities mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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