PTE Versus WMH: Live Without a Wire

24 April 2007 at 9:20 am by Gary Gordon

One of the biggest mistakes a prospective ETF investor can make is the error of assumption: specifically, just because a basket of exchange-traded stocks calls itself a diversfied basket or index, one should not assume that it is diversfied.

For instance, the Wireless HOLDRS (WMH) gives unwary investors the perception that they are targeting a broad range of wireless companies. And at first glance, with holdings like Sprint Nextel, Motorola, Nokia, Qualcomm and Research in Motion (Blackberry’s backer), one might believe he/she has plenty of diversfication.

The problem with this assumption lies at the heart at what diversification means; that is, are you diversfied when all of your wireless/telecom exposure rests in the largest companies alone? Are you diversified when 90% of the movement of WMH depends on 3 stocks: Nokia, Qualcomm and Motorola?

In complete contrast, the Powershares Dynamic Telecom and Wireless Portoflio (PTE) is genuinely representive of the sector. Give or take, 1/3 of the holdings are concentrated in large companies, 1/3 are concentrated in mid-sized companies and 1/3 are concentrated in small-cap stocks. Moreover, the Powershares Dynamic Telecom and Wireless Portoflio (PTE) does not have any holding with more than a 6% weighting, whereas Motorola alone represents 41% of the movement of WMH.

Granted, if you believe Motorola and Nokia represent the next big wave up, well then… you could reasonably expect the Wireless HOLDRS (WMH) to perform accordingly. Yet the fact remains, you would not be achieving the diversfication that you may have intended across the entire segment of the economy.

Finally, it should not be lost on anyone that, when Motorola is down 18% over one year and 30% since its summertime peak, the performance of the undiversfied basket suffers. In contrast, the diversfied Powershares Dynamic Telecom and Wireless Portoflio (PTE) is up 20% over the past year.