What’s The Difference? Understanding What Distinguishes Similar ETFs

by on December 6, 2011 | Updated July 9, 2014

With over 1,600 exchange-traded products on the market as of 2014, investors have likely run into some seemingly “duplicate” offerings. While many of the “plain vanilla” products have quite a bit in common, there are more than a handful of funds which offer seemingly identical exposure, although a closer look under the hood reveals some noteworthy surprises [see 25 Things Every Financial Advisor Should Know About ETFs]. The old saying “never judge a book by its cover” can certainly help investors when it comes time to doing the proper research necessary for selecting a fund that best suits their objectives and risk tolerance.

Transparency, one of the many benefits offered through the exchange-traded product structure, allows for investors to take a detailed look under the hood of a product, as most issuers publish a complete list of holdings on a nightly basis. In many cases, the holdings of popular products like the S&P 500 SPDR (SPY) are fairly predictable; however, given the impressive evolution of the ETF universe, investors are now faced with dozens upon dozens of first-to-market products, which may offer vastly different exposure than their name might suggest [see Never Judge An ETF By Its Cover].

Doing your homework on a fund now is more important than ever as innovative investment strategies and unique index construction methodologies can result in a portfolio that includes some surprising components. Below we highlight four pairs of seemingly similar ETPs, although a closer look under the hood reveals some intriguing differences:

  •  UBS E-TRACS Alerian MLP Infrastructure Index (MLPI) / ALPS Alerian MLP ETF (AMLP): The MLP segment of the energy sector has been able to attract capital inflows as investors are opting for consistent current income in lieu of lucrative capital gains amidst the largely uncertain economic landscape. Launched in late 2010, AMLP is linked to the same Alerian MLP Infrastructure Index as its veteran counterpart, MLPI, which debuted earlier that same year. For investors interested in MLP exposure, there are potential advantages in both the ETF (AMLP) and ETN (MLPI) structures. ETNs eliminate tracking error, since they are debt securities whose performance is linked to that of an index, which in effect exposes investors to the credit risk of issuing institution. On the other hand, for investors focusing on after-tax yield, the treatment of distributions is generally more favorable (from a tax perspective) under the ETF structure. If the underlying MLP securities depreciate or stay relatively flat, the advantageous tax treatment of distributions will offset any potential drawbacks related to the creation of a deferred tax asset or liability [see MLP ETFs: Fact And Fiction].
  • Van Eck Market Vectors Gold Miners (GDX) /Global X Pure Gold Miners ETF (GGGG): There are numerous gold ETFs on the market today, offering investors both direct and indirect exposure to the most popular precious metal. Investing in gold mining companies is a popular alternative for those seeking tangential exposure to the price of gold, and GDX dominates this space, with over $8 billion in assets under management. Interestingly enough, a closer look under the hood reveals that GDX features rather hefty allocations to large mining companies that mine for a plethora of other metals besides gold. For example, this ETF allocates 5% of its assets to Silver Wheaton Corporation, resulting in a surprisingly different portfolio composition that many might not expect judging by its popularity and name. For investors looking for “pure play” gold miners exposure, GGGG is the superior choice [see Special Report: Gold ETFs In Focus]. This one-of-a-kind offering from Global X holds a basket of 29 companies which derive at least 90% of their revenues from gold mining [see GGGG Holdings]. 
  • State Street SPDR Gold Trust (GLD) / iShare COMEX Gold Trust (IAU): Investors who prefer physically-backed exposure to the price of gold may be surprised to learn that the two most popular funds have several noteworthy differences. The behemoth in the space, GLD, has over $33 billion in assets under management and charges an expense ratio of 0.40% [see Three Reasons Why Gold Is Overvalued]. IAU is the runner-up in terms of size, with almost $7 billion in assets, although this iShares alternative boasts an expense ratio of just 0.25%. Although cheaper, IAU pales in comparison to GLD from a liquidity perspective, seeing as how GLD trades well over 15 million shares daily and has an incredibly active options market, making it one of the most liquid ETFs on the market period. It should also be noted that each share of GLD represents approximately 1/10th ounce of physical gold, while IAU represents approximately 1/100th ounce per share. IAU may appeal to long-term, buy-and-hold investors thanks to the virtually identical, but cheaper, exposure it provides relative to the more popular GLD.
  • First Trust ISE Global Copper Index Fund (CU) / Global X Copper Miners ETF (COPX): In the late 2000s and the early 2010s, copper has become a popular investable asset as it is capable of providing a hedge against inflation while also serving as an indirect play on continuing growth across emerging markets. For investors who wish the avoid the nuances associated with futures-based commodity products, establishing exposure to copper miners has become a popular alternative. CU and COPX are currently the only two available options as of 2011, and investors should take a closer look at each of the fund’s respective holdings before simply opting for the bigger, more popular First Trust offering. CU includes a number of diversified mining companies that count on copper for only a minor portion of their revenues, resulting in a risk/return profile that is vastly different from what the fund’s name might suggest. Investors ought to consider COPX , which undertakes a different approach; this ETF features allocations to companies who exclusively operate in the copper mining industry, providing investors with “pure play” exposure to one of the most lucrative corner of the basic materials sector [see Copper ETFs In Focus: Five Ways To Play].

Disclosure: No positions at time of writing.