I keep pretty close tabs on the ETF industry. I’m not easily impressed, but I have to say that sponsors are on a roll in 2011. They’re bringing out innovative new products at a record pace.
Today I will highlight a few of the most promising new ETFs for you. I’ll also name a few you may want to avoid. You don’t want to miss this valuable information.
A New Crop of ETFs!
Back in February I wrote about The ETF Boom: 1,124 and Counting! As promised, I have continued to count. And as of April 5, the number of U.S.-listed exchange traded funds and exchange traded notes stood at 1,176.
So far in 2011 we’ve seen 77 new ETFs and ETNs listed — 74 in the first quarter and 3 more already this month. For the first time in years, we went an entire quarter without seeing any ETF or ETN products closed and liquidated.
Here are a few of the new crop that seem to be gaining traction. Note that I’m listing them in ticker-symbol order — no favoritism here.
WisdomTree Asia Local Debt (NYSE:ALD) came out last month with an impressive $145 million in initial assets. An asset base of this magnitude at launch is unheard of — most new funds come to market with just $3 million-$5 million in seed money.
ALD will try to maximize its total return by investing in local debt denominated in Asia Pacific regional currencies, excluding Japan. Top holdings include paper from Indonesia, Malaysia, South Korea, Thailand, Singapore, and Australia.
PowerShares Senior Loan Portfolio (NYSE:BKLN) is the first “floating rate” bond ETF. These are a tiny step up from high-yield or “junk” bonds. “Senior” loans are ranked higher than a company’s other debt and sometimes are secured by collateral.
The really interesting part about BKLN is that its portfolio consists of debt whose interest rate resets periodically — every three months or so — similar to an adjustable-rate mortgage. From the lender’s perspective (and the lender is you if you buy BKLN), the reset limits the risk of rising interest rates. It does not, however, remove the risk of borrowers defaulting.
IQ Global Agribusiness Small Cap (NYSE:CROP) is another new niche. Several ETFs already cover the food production sector, but CROP zeroes in on the smallest 10 percent of such stocks. This is potentially a new way to profit from rising food prices.
FactorShares is a new sponsor with a new twist: ETFs that hold “spreads” in various markets. A spread is a trade involving simultaneous exposure to bullish (long) and bearish (short) positions in different securities or markets. The idea is to capture the performance difference between both sides of the spread.
For instance, maybe you are bullish on bonds and bearish on stocks. FactorShares 2X TBond Bull/S&P 500 Bear (NYSE:FSA) gives you that trade in one simple package. You can also do the reverse. If you are bullish on stocks and bearish on bonds, look at FactorShares 2X S&P 500 Bull/TBond Bear (NYSE:FSE).
FactorShares has similar funds that try to profit from the spread between stocks and the U.S. dollar, gold, and crude oil prices. All have a 2X daily leverage factor, so they aren’t for widows and orphans.
AdvisorShares Active Bear (NYSE:HDGE) is the first actively-managed short selling ETF. The managers of HDGE use fundamental research to build a portfolio of 20-50 stocks they think are overpriced.
Inverse index funds have been available for years, of course. HDGE is the first to use the ETF format to pick individual stocks that seem likely to decline. We don’t yet know if they will succeed, of course, but the concept is a good one.
Bearish bond investors may want to look at Direxion Daily Total Market Bear 1x Shares (NYSE:SAGG). Unlike Direxion’s previous inverse offerings, SAGG does not have a built-in leverage factor.
SAGG tracks a broad-based index of the entire investment-grade fixed-income market: Treasury bonds, corporates, asset-backed, and more. If you are broadly bearish on bonds but not comfortable with leverage, SAGG may be a good alternative.
Vanguard Total International Stock ETF (NYSE:VXUS) isn’t exactly unique, but it is a new alternative. And because it comes from Vanguard, the ETF has low fees and will probably attract a base of support over time.
VXUS covers all the world’s investable equity markets except for the U.S. It includes both developed and emerging markets. Two groups of investors may find VXUS useful …
First, those who have a well-diversified portfolio of U.S. stocks can easily add an international slice without duplicating what they already own.
Second, if you happen to be bearish on U.S. stocks but bullish everywhere else, VXUS may be just what you need.
WisdomTree Managed Futures Strategy Fund (NYSE:WDTI) is a very interesting new ETF, the first to track the S&P Diversified Trends Indicator (DTI).
The DTI is a rules-based index using a seven-month moving average to take long or short positions in 24 commodity and financial futures contracts. (Energy is an exception: It can be neutral but not short.)
This makes WDTI an “absolute return” ETF. The goal is to achieve positive performance in both up and down markets. This makes it a great diversification tool for those who want a well-balanced portfolio.
Some Not-So-Promising New ETFs
If all the above sound interesting, keep in mind that the ETF industry isn’t at all perfect. Some of the new ETFs are, in my opinion, duplicative “me-too” projects. A few are just harebrained ideas from people with too much time on their hands.
Here are some new ETFs and ETNs that seem to be going nowhere, at least so far …
- ESG Shares Pax MSCI EAFE ESG Index ETF (NYSE:EAPS)
- Global X Russell Emerging Markets Growth ETF (NYSE:EMGX)
- Global X Russell Emerging Markets Value ETF (NYSE:EMVX)
- RBS US Midcap Trendpilot ETN (NYSE:TRNM)
I’m not necessarily saying these are bad funds or bad concepts, but for one reason or another, investors are not putting money into them. Without assets, the sponsors cannot generate fees. Without sufficient fees, the ETF is not profitable and runs the risk of being shut down.
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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