JJ Feldman: Creating a diversified portfolio takes time, tools, and discipline in order to implement a strategy to meet your preferred outcome.
For anyone looking to diversify their portfolio, unusual ETFs could be very beneficial. Like Robert Frost’s well-known poem, “The Road Less Traveled”, certain ETFs might not seem like the obvious choice, but could present an unusual path to outperform in the market.
Sometimes, the best ETFs aren’t the popular ones. Unique ETFs can serve as an excellent alpha creator over the benchmark. These ETFs add exposure to interesting asset classes while providing lower correlations than the broader market. As ETF providers are continuing to find innovative products and indexes, portfolio strategies are becoming revolutionized.
It’s not exactly easy finding interesting ETFs that make sense given that there are so many diverse ETFs in the market and a myriad of terms used to describe them (smart beta, dumb beta, cap weighted, dividend weighted.) An investor should setup stock screens in terms of what they are looking for. Using screens, such as beta, standard deviation, earnings per share growth (valuation metrics) or prior performance can help individuals identify attractive ETFs that have performed well with less correlation.
If you come across an interesting ETF and it has recently launched, meaning no live track record, watch and evaluate how it performs over a certain time period to determine how its performing on both up and down days.
One ETF that particularly interests me is First Trust US IPO ETF (NYSEARCA:FPX). This is a five star fund that has an impressive track record. The ETF doesn’t just own IPOs; it also owns spinoffs. It rebalances quarterly and picks up the prior quarter’s IPOs and spinoffs. The IPOs will be held for 1,000 days, so companies like Facebook (FB) are still in the fund.
Facebook, which has done quite well, is the fund’s largest holding at close to 10%. The fund does not allow positions to be greater than 10%. It’s comprised with approximately 68% IPOs with the remainder being spinoffs. It buys the 100 largest by market cap, so a small IPO will not make it into the fund.
Companies such as GoPro are not in the index; they are not big enough. Although, that’s not to say that it cannot be added. Other top holdings are Abbvie (ABBV) and Kraft (KRFT), both of which are spinoffs. So far in 2015, FPX is up over 8%.
FPX has been around since 2007 and has a live track record over a measurable period of time. Obviously it’s easier to evaluate this because you can see actual performance and not just back tested results.
Another interesting ETF is the SPDR Biotech ETF (NYSEARCA:XBI). The estimated earnings growth for this ETF is north of 30%. XBI has 99 holdings with companies ranging in size from $260M to $160B – that is definitely diversification.
Although biotech ETFs have been on fire the past few years, XBI was up a whopping 48% in 2013, 45% in 2014 and so far this year it’s up over 20%.