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Ukraine's Lesson for Investors: Know What's in Your ETFs


EMB and PCY each have billions in assets, and I'll bet they have shareholders who wouldn't discover they had exposure to Ukraine until after a default occurred.

Similarly, there are many equity ETFs with very large weightings in individual stocks or specific sectors that could overly influence the funds' performance. Investors need to understand and monitor these funds well, too.

A case in point is the weighting of Teva Pharmaceuticals (TEVA) in the iShares MSCI Israel Capped ETF (EIS) at 27% vs. just 13% in the Market Vectors Israel ETF (ISRA). TEVA's share price has struggled for much of the last couple of years in part because of concerns about the company's ability to grow its earnings.

TEVA's struggles have been apparent in the performance dispersion of the two funds. Since ISRA's inception in June 2013, it is up 22%. But EIS has gained only 13%.

It should be noted that TEVA has done well so far in 2014, but a 900-basis-point gap in less than a year for two funds tracking the same country is remarkable. Going forward, TEVA will continue to make a difference in the performance of these two funds.

An investor interested in exposure to Israel needs to keep tabs on TEVA just as investors in emerging-market bond ETFs need to keep tabs, for the moment, on the Ukraine. This sort of effect exists in dozens of funds, and with the transparency offered by ETFs, there is no reason to get blindsided by a fund's holdings.

At the time of publication, Nusbaum had no positions in stocks and ETFs mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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