Ready to Add a New ETF? Know What You Already Own

This is an important question, as it is unlikely the ETF under consideration would be the first investment in someone’s portfolio. My assumption is that listeners, or you as an advisor, are not seeking information about your first ETF. Rather before you fully consider purchasing it, you need to understand what makes the fund different from what you own.

I don’t know what you own. But if you hold any ETFs, we can presume that one of them is an S&P 500 Index-based ETF. The three largest U.S. listed ETFs track that large-cap equity benchmark, and the trio collectively manages $2 trillion in assets. 

However, you might be focused on growth or technology themes and have exposure to the Nasdaq 100. The Invesco QQQ Trust (QQQ B) and the lower cost Invesco NASDAQ 100 ETF (QQQM B+) manage over $400 billion in assets. While some people think the stocks inside the index are technology stocks, this is not the case.

Meanwhile, if you own any internationally focused ETFs, we can surmise that you likely own a developed market index fund. The Vanguard FTSE Developed Markets ETF (VEA A-) and the iShares Core MSCI EAFE ETF (IEFA A) are the seventh and eighth largest ETFs trading in the U.S. and manage more than $325 billion.

Let’s talk about a few examples of ETFs that could complement one of the above ETFs for an informed reader. We will also discuss what advisors should be thinking about when sorting through the 4,000 funds they don’t own.

The MFS Active International ETF (MFSI ) launched in late 2024. While MFS has a century-long history focused on active management, MFSI was part of the firm’s first suite of ETFs. The ETF has gained in popularity in the last nine months and now manages $430 million. 

Like IEFA and VEA, MFSI is geographically well diversified. However, a major difference is that actively managed MFSI recently had 22% of assets invested in emerging markets. For instance, Taiwan Semiconductor and Tencent Holdings were the largest holdings. In contrast, IEFA and VEA do not own these Asian stocks, as the index-based ETFs only own shares of companies based in countries classified as developed markets; China and Taiwan are emerging markets. Advisors that owned IEFA and VEA might want to pair it with an active ETF that has discretion to own developed and emerging market securities. 

Artificial intelligence (AI) thematic ETFs have gained traction in recent years. Indeed, many of the largest U.S. companies — Alphabet, Apple, Microsoft, Meta Platforms — have focused their capital investments to support the growing usage and use cases for AI. These stocks are heavily owned by QQQ and QQQM.  Apple and Microsoft are classified as information technology stocks by many index providers, while Alphabet and Meta are in the communications services sector.

Some AI focused ETFs similarly have large stakes in these mega-cap growth stocks. However, not all of them do. For example, the ROBO Global Artificial Intelligence ETF (THNQ B-) has a limited 21% overlap with the Nasdaq 100 ETFs. Indeed, THNQ’s largest recent positions were Astera Labs, Ambarella, Pure Storage and Tempus AI.

As an advisor, ultimately understanding what your ETFs own and how they overlap with potential other holdings is key to building a successful and well-diversified portfolio.

VettaFi is the index provider for THNQ, for which it receives an index licensing fee. However, THNQ is not issued, sponsored, endorsed, or sold by VettaFi. VettaFi and its affiliates have no obligation or liability in connection with the issuance, administration, marketing, or trading of THNQ.

Originally published by Advisor Perspectives

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