While the transparency and simplicity of most ETFs allow investors to get away with going light on the diligence, this doesn’t always hold true.
ETFdb.com looks under the hoods of five ETFs to discover some surprising nuances about a number of exchange-traded funds.

By now, hopefully everyone knows that the United States Natural Gas Fund (UNG) doesn’t actually buy and hold natural gas and that USO’s underlying assets don’t include barrels of crude oil.

The Truth About “Country-Specific” ETFs
The rise of the ETF industry has allegedly brought nearly every corner of the globe within reach of millions of investors. With country-specific funds targeting nearly every imaginable location, ETFs have been praised as a revolutionary new portfolio tool that allows investment in dozens of economies. Unfortunately, this is only half true. Most international ETFs are dominated by mega-cap companies that generate their revenues from around the world and just happen to be headquartered in a certain country. An investment in Toyota and Honda through a Japan ETF doesn’t provide exposure to the local Japanese economy, as these stocks be impacted more significantly by a change in U.S. consumer habits than economic growth in Japan.

The iShares MSCI Spain Index Fund (EWP) is a good example. Banco Santander and Telefonica, two of the largest publicly-traded Spanish companies, account for about 23% and 18% of EWP, respectively. Banco Santander generates only about 26% of its profit from Spain, with South America (36%) and the United Kingdom (16%) accounting for more than half of earnings. Less than 45% of Telefonica’s profit comes from Spain, as again Latin America (40%) and Europe (17%) account for significant portions of operations.

There’s nothing faulty or deceptive about international equity ETFs, but investors should be aware of the limitations imposed by the mega-cap focus, and the significant differences in risk and return profiles between these ETFs and small-cap international funds (as detailed in this analysis).

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SOURCE: http://etfdb.com/2010/five-little-known-secrets-of-ultra-popular-etfs/