ETFs are all the rage right now in investing for good reason. They are tax efficient with low expenses and can be used to create almost any investing strategy imaginable.
XLI is an example of an ETF that contains only stocks in the industrial sector. When you invest in XLI, you’re getting a small piece of 500 different stocks. After seeing an advertisement in Barron’s magazine this weekend for XLI, I was reminded that with every ETF you have to take the bad with the good.
General Electric (GE) is the top stock holding in the ETF and it accounts for 7% of the total fund. GE’s stock price is going through a tough time recently and its stock price is down 16% for the year.
The other top 10 holdings in the ETF have done well this year and have all returned a positive percentage:
Year to date XLI has a performance return of 13.04%. This is a pretty good return and in line with how the overall market has done. But if we take GE’s abysmal performance out of XLI it would have increased its return by an additional 2% to over 15%.
There’s no free lunch in investing. Even if you are going to use ETFs you still have to know what is inside the ETF that you are purchasing. Even one bad stock out of 500 can have an impact on the overall return.