Courtesy of Karen Damato, WSJ Reporter

Most ETF names appear to leave little to the imagination. They seem to describe what the fund is all about.

But beware: Sometimes you can’t judge an ETF by its cover.

A “Middle East & Africa” fund with only 5% of assets in the Middle East? A “BRIC” fund—you know, for Brazil, Russia, India and China—that has just 2% of its assets in Russia? A “homebuilders” fund that has only 26% of its assets in companies that build homes?

Yes, that’s right.

In many cases, the ETFs are simply aping the names of the indexes they track, so the issue is more one of index composition than duplicitous marketing. But “a misleading name is a misleading name,” says Robert Goldsborough, an ETF analyst with investment researcher Morningstar Inc. And “the first thing anyone sees about an ETF is the name.”

ETF sponsor State Street Global Advisors, a unit of State Street Corp., recently noted in an online checklist designed to help investors analyze ETFs that “many ETFs belie their name.” Thus, “it’s necessary to look beyond the fund’s name or the index it tracks” to analyze the underlying holdings.

Some questionable names are found in State Street’s own lineup, researchers say. IndexUniverse points to SPDR S&P Emerging Middle East & Africa, GAF -1.89% an $88 million ETF that recently had 91% of its assets in South Africa, 4% in Morocco and—for its Middle East exposure—5% in Egypt. Egypt is the only Middle East country that Standard & Poor’s classifies as an “emerging” economy.

Mr. Goldsborough takes issue with State Street’s $2.2 billion SPDR S&P Homebuilders XHB +0.15% . It recently had 74% of assets in companies that are related to but not directly engaged in home building, such as top holdings Whirlpool Corp. and Lowe’s Cos.

A State Street spokeswoman didn’t respond to requests for comment. Continue reading →