What's In An ETF Name Often Requires Further Investigation

The old adage about not judging books by their covers is particularly applicable when it comes to exchange-traded funds. Many ETFs from competing issuers have similar names, but further examination reveals these funds are far from being twins.

Take the case of the WisdomTree Europe Hedged Equity Fund (NYSE:HEDJ), highlighted in a note out from CFRA Research Thursday.

Example No. 1

As CFRA pointed out, HEDJ's name arguably implies it is a broad Europe ETF, indicating that it can hold British, Swedish or Swiss equities. In reality, HEDJ has become one of the bellwether Europe ETFs trading in the U.S. because it is a dedicated eurozone play, focusing only on countries that use the euro, while providing a currency hedge.

Conversely, the iShares MSCI Eurozone ETF (NYSE:EZU) clearly indicates that it is a dedicated Eurozone ETF. However, that ETF lacks the currency hedge found in HEDJ, explaining why HEDJ is up 29.2 percent over the past 36 months while EZU is in the red.

Some currency-hedged ETFs such as iShares Currency Hedged MSCI Eurozone are explicit that they focus on companies domiciled in the European Monetary Union, such as Sanofi and Siemens. But, HEDJ sounds like an ETF that might also have exposure to British American Tobacco or Nestle. Yet HEDJ has no exposure to companies based in the United Kingdom or Switzerland because it too focuses only on the eurozone, said CFRA.

Example No. 2

Another prime example of an ETF pair with similar names but widely different underlying baskets of holdings are the the iShares U.S. Home Construction ETF (NYSE:ITB) and the SPDR S&P Homebuilders ETF (NYSE:XHB).

ITB focuses more on pure-play homebuilders while XHB has a heavy discretionary tilt. Not surprisingly, their three-year returns are not close as ITB is higher by 27.3 percent compared to 16.3 percent for XHB.

Another good example is the case of the Vanguard Telecom ETF(NYSE:VOX) and the SPDR S&P Telecom ETF (NYSE:XTL). VOX is heavily allocated to AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ), while XTL mixes in newer technology names, including some cybersecurity stocks.

XTL outperformed VOX by more than 200 basis points in 2016, but underperformed by 400 basis points in 2015, a reminder that when the constituents are different the records will be as well, added CFRA.

The research firm has Market-Weight ratings on HEDJ, VOX and XTL and Overweight ratings on the two homebuilder ETFs.