In The Parent Trap, Annie and Hallie meet at summer camp and slowly realize they're twins, separated at birth and raised on opposite sides of the world. Same DNA, same starting point--but after eleven years apart, they had turned into different people. Index funds pull the same trick.
iShares' VLUE, a large-cap value ETF, is up 47% through Q2. Vanguard's VTV, also large-cap value, is up just 15% over the same stretch.
Emerging markets tell the same story. iShares' IEMG is up 24%. Vanguard's VWO, again nominally covering the same market segment, is up 11%.
Two pairs of funds that are supposed to be twins, yet their performances are completely different. The gap comes down to three stocks: Micron, Samsung, and SK Hynix.
Micron is up over 300% through Q2 and has grown to over 20% of VLUE's holdings--versus just 4% of VTV's. Samsung is up 179%, and SK Hynix is up 308%. Combined they make up 13% of IEMG holdings but don't appear in VWO at all.
What's going on?
Micron: VLUE and VTV are both "large-cap value" ETFs, but VLUE is structured to allow much greater concentration of any one stock. It focuses on sector weighting, and there are only a few tech stocks that even pass the value screen. So Micron has become a major holding inside the fund.
Samsung and SK Hynix: IEMG tracks the MSCI Emerging Markets Index, which still classifies South Korea as emerging. Samsung and SK Hynix are both based there. VWO tracks the FTSE Emerging Markets Index, which upgraded South Korea to developed status in 2009. FTSE based this decision on market size and investor perception, but MSCI has maintained its emerging classification based on restrictions for foreign institutional investors.
None of this makes one fund "wrong." It just means two ETFs can wear the same label--large-cap value, emerging markets-- and still be running completely different books underneath. The twins only look alike from the outside.
The lesson isn't "pick the winner." It's that the label on the fund tells you a lot less than you would think. If you don't know what's actually inside your portfolio, you don't really know what you own.
__________
Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@lefleurfinancial.com.
Josh Norris, CPA, CFP, CFA is the managing member of LeFleur Financial, a wealth management and tax advisory firm.