Extreme makeovers historically have been rare in the ETF world, averaging less than one per year. In stark contrast, the past few weeks produced three such events, blowing the doors off of historical trends.
It isn't unusual for an ETF to change its underlying index to a different but related one. For instance, a move for an international ETF from a MSCI to FTSE index keeps the ETF in a similar market. We also often see minor name changes that keep the meat and potatoes of the fund intact. Those are just touch-ups, not makeovers. An extreme makeover takes place when an existing ETF undergoes a significant change in its objective and/or underlying index resulting in the majority of its portfolio changing. In short, it should have been the closure of one ETF and the launch of a new one.
In the past few weeks, three ETFs disappeared and radically different ETFs took their place. These events will escape the ETF closure and launch statistics because they neither closed nor launched -- they underwent extreme makeovers.
db X-trackers MSCI Germany Hedged Equity Fund (NYSEARCA:DBGR) is the new incarnation of db X-trackers MSCI Canada Hedged Equity Fund (DBCN) effective May 31, 2013. DBGR will follow the MSCI Germany U.S. Dollar Hedged Index, which provides German equity markets exposure while reducing the effects of fluctuations between the value of the U.S. dollar and the euro. The top five holdings include very familiar names: Bayer AG at 8.5%, BASF AG 8.3%, Siemens AG 8.0%, SAP AG 6.5%, and Allianz AG 6.3%. Investors will pay an expense ratio of 1.04%, and more information can be found on the DBGR overview page.
Analysis/Opinion: From the name alone, it is easy to see that the makeover version of this ETF has zero overlap with its prior holdings. All Canadian stocks have been replaced with German stocks, and the Canadian dollar hedge is now a euro hedge. The new version should produce results similar to being long iShares MSCI Germany (NYSEARCA:EWG) and short the euro.
First Trust Capital Strength ETF (NASDAQ:FTCS) is the new incarnation of First Trust Strategic Value Index Fund (FDV) effective June 3, 2013. FTCS will attempt to match investment and yield results (before fees and expenses) of The Capital Strength Index, a newly created equity index. The Capital Strength Index methodology: 1) start with the largest 500 companies on the Nasdaq that have a three-month average daily dollar volume of at least $5 million, 2) delete companies that do not have at least $1 billion in cash or short-term investments, a market-cap-to-long-term-debt ratio less than 30%, and a return on equity greater than 15%, and 3) rank the remaining companies by three-month and one-year volatility and hold the 50 stocks with the lowest combined volatility scores.
The index caps industry concentration at 30%. Sectors with more than a 10% weighting include Industrials (22.9%), Healthcare (19.4%), Consumer Goods (17.1%), Consumer Services (14.0%), and Technology (12.3%). FTCS has its expense ratio capped at 0.65%. More information can be found on the FTCS overview page.
Analysis/Opinion: Although not part of its name, the revised version of this ETF selects its holdings strictly from Nasdaq listings, while the former version consisted predominately of NYSE stocks. Combining this universe change with the strategy change constitutes an extreme makeover. The fund has more than $30 million in assets and a nearly seven-year track record of superior performance. FTCS now owns that historical performance, even though the strategy change (based on a newly created index) renders it meaningless.
YieldShares High Income ETF (NYSEARCA:YYY) is the new incarnation of the Sustainable North American Oil Sands ETF (SNDS) effective June 21, 2013. YYY's goal is to provide monthly income by investing in a basket of 30 closed-end funds (CEFs). The portfolio uses the ISE High Income Index, which selects closed-end funds based on their overall ranking in three factors: yield, discount to net asset value, and liquidity.
The CEFs currently on the top of the list include ING Global Equity Dividend & Premium Opportunity (NYSE:IGD) at 4.7%, Eaton Vance Tax-Managed Dividend Equity (NYSE:ETY) 4.6%, Eaton Vance Risk-Managed Dividend (NYSE:ETJ) 4.6%, Eaton Vance Enhanced Equity Income (NYSE:EOS) 4.5%, Eaton Vance Buy-Write Opportunity (NYSE:ETV) 4.5%, Blackrock Enhanced Equity Dividend (NYSE:BDJ) 4.5%, and AllianzGI NFJ Dividend Interest & Premium (NYSE:NFJ) 4.5%.
Current asset weightings are 59% Equity CEFs, 26% Debt CEFs, and 15% Asset Allocation funds. YieldShares High Income ETF sports an expense ratio of 1.65% (0.50% management fee and 1.15% acquired fund fees). More information is available on the YYY overview page.
Analysis/Opinion: What do companies involved with North American oil sands have in common with U.S. listed closed-end income funds? Nearly nothing. Only 48% of the portfolio holdings of SNDS had a U.S. listing, and none were CEFs. A 100% portfolio turnover renders this ETF an extreme makeover. The YYY fact sheet (PDF) claims the underlying index has a 9.9% distribution yield, which accounts for the 1.15% acquired fund fees. This implies a 9.4% yield for YYY. It will compete with PowerShares CEF Income Composite (NYSEARCA:PCEF), which has an identical 0.50% management fee (with 1.23% in acquired fund fees) and a distribution yield of 8.4%. PCEF’s asset allocation of 3% equity, 61% debt, and 35% option income is substantially different though, perhaps making the two funds complementary instead of competing.
Disclosure: Long PCEF. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.