Three Niche ETFs Crushing The Market

ETFsNeena Mishra: The ETF industry continues to grow and evolve. Total assets in US listed ETFs exceed $1.5 trillion, while the number of products is more than 1,500 now. However, the industry continues to be top-heavy.

The largest ETF SPDR S&P 500 ETF (SPY) now has more than $147 billion in AUM, while the top 10 funds hold almost 30% of total industry assets.

Larger ETFs are usually more popular with investors as most of them follow the simpler market cap weight methodology, often have lower expense ratios and ample liquidity.

At the same time, some ETFs that focus on ‘niche’ strategies have been outstanding performers and are worth a look as they are expected to continue their outperformance going forward. (Read: 3 Ultracheap ETFs for Value Investors)

Below we present three such ETFs that have outperformed the broader market year-to-date as well as over one year and three year periods. But they remain rather unknown due to lack of investor interest.

YTD Return One Year Return Three Year Return
CSD 41.8% 52.0% 105.9%
FPX 35.7% 44.2% 102.2%
PKW 32.8% 32.2% 82.7%
SPY 20.5% 19.6% 57.1%

Spin higher profits with Guggenheim Spin-Off ETF (NYSEARCA:CSD)

 shows that spun-off entities generally outperform their parents and the broader market. They typically underperform in the first few weeks of trading–presumably due to selling by institutional investors, but they recover nicely subsequently.

The typical spinoff whose parent is in the S&P 500 underperformed the index by 2.4% over the first month, but outperformed the index by 5.6% over three months and 17.4% over 12. (Read:3 Megacap ETFs for Mega Returns)

One of the reasons could be that investors prefer focused smaller companies more than bigger diversified ones. CSD tracks the Beacon Spin-off Index that includes companies that have been spun-off within the past 30 months but not more recently than six months prior to the applicable rebalancing date. Index constituents are primarily small- and mid-cap companies with capitalizations under $10 billion.

The index is comprised of up to 40 highest-ranking stocks selected from a universe of spun-off companies, using a quantitative rules based methodology.  Each stock is given a modified market cap weighting with a maximum weight of 5%, resulting in a pretty diversified basket. The index is rebalanced semi- annually.

The product has $371 million in AUM, currently invested in 25 securities. Top holdings include Phoenix New Media, Exelis, Lumos Networks and Tripadvisor. In terms of sector allocations, Industrials, Consumer Discretionary and Energy occupy the top three spots.

The fund charges an expense ratio of 65 basis points annually.

Play the Booming IPO Market with First Trust US IPO Index Fund (NYSEARCA:FPX)

The IPO market has been extremely hot this year, delivering its best performance in six years—. with the number of deals priced so far totaling 160, far ahead of 109 deals priced through the same date in 2012, per Dealogic.

The main reasons for soaring interest in IPOs are an improving economy and an excellent stock market performance. Among the most anticipated upcoming offering are Twitter, Hilton Holdings and Chrysler. China’s largest e-commerce company, Alibaba is also reported to be planning an IPO in the US.

FPX provides a low-risk and convenient way to profit from the US IPO resurgence.

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