Just Because It's an ETF Doesn't Mean It's Diversified -- Know What You Own
Index funds have been around for a long time. The most recent big step in their development has been the advent of exchange-traded funds (ETFs). There are very good reasons to like ETFs, including the benefit of being able to diversify your holdings with the purchase of just one equity. But you have to understand what you are buying -- just because you are buying an index fund doesn't necessarily mean you are buying a diversified portfolio.
Here are some examples to highlight the concentration risk you might inadvertently take on if you don't dig into the index methodology of the ETFs you buy.
Exchange-traded funds are fairly complex pooled investment vehicles. You don't need to know all of the nuances to make use of them -- but you can't just look at a fund name and its objective and call it a day. That's because there are shades of gray involved here.
Source Fool.com
