On New Sector and Country ETFs

by: Roger Nusbaum

A few ETP odds and ends.

PowerShares filed for small cap sector ETFs for all ten of the big S&P 500 sectors. The funds will be called PowerShares S&P SmallCap then whatever sector it tracks. For anyone so inclined you can probably glean what the funds might hold by looking at the iShares S&P Small Cap 600 Index Fund (NYSEARCA:IJR) as the funds will be comprised of stocks from this index.

I think the choice being available is absolutely a plus in terms of being able to manage cap size in a portfolio. They could also be good and offer better diversification for people willing to do the work of building a portfolio at the sector level but would rather not pick individual stocks.

However, there are a lot of specialized or thematic ETFs that offer smaller cap exposure to various sectors. One example mentioned previously is the PowerShares Water Portfolio (NASDAQ:PHO), which is a client holding. PHO is 76% industrial stocks and has an average market cap of about $4 billion versus about $45 billion for the mega cap dominated Industrial Sector SPDR (NYSEARCA:XLI).

Some specialized funds are not so focused into one sector, like the iShares Global Infrastructure (NYSEARCA:IGF) which is 40% industrials, 37% utilities and 20% energy. It can still be integrated into a portfolio, I do so with IGF for some clients, but there is a little more to pay attention to with this type of fund. I think it is worth the effort but still it is more work.

Next up is that WisdomTree is closing ten funds including one that I have been using for some accounts, the International Communications Fund (DGG). The other sector funds being closed are tech, financials, healthcare, staples, discretionary and industrials along with a couple of other funds. The three sectors funds that will survive are utilities, basic materials and energy (the energy fund is a core holding that I combine with a couple of individual stocks).

That so many sector funds are getting cut raises a couple of questions. Does this mean that not that many people are building portfolios at the sector level? What about foreign sectors? The upside could be that the people who do build at the sector level can add real value to their portfolios but I hope this does not lead to a massive contraction in themed funds. They stand to be increasingly more important in the new decade if in fact broad indexes don't quite get the job done, as was the case for the decade just ended.

Next up is that iShares filed for four new country funds: Poland, small cap China, Indonesia and New Zealand (finally). The first three are me-too funds, but long time readers know that I am most curious about the New Zealand fund.

It is likely that New Zealand Telecom (NZT) would be the largest holding but there is one aspect that could make the fund less than ideal, which is that quite a few Australian companies have dual listings in New Zealand presumably because they do business in NZ too.

For example Australia & NZ Bank (ANZ) (client holding) and Westpac Banking (NYSE:WBK) are also listed in Wellington and the prospectus lists "Australia Risk" as one of the risk factors. Companies from the farming or agricultural groups probably will not have a large weighting (but I hope I am wrong) and if Fonterra ever goes public then it would be one of the largest holdings.

Moving on, UBS has listed an ETN that provides exposure to the S&P 500 priced or hedged in gold. The ticker is SPGH. Candidly, I do not know if it is more correct to think of it as hedged in gold or priced in gold but Ron Rowland did a thorough write up where he says to leave it alone. I don't think I'm going to spend a lot of time on it but I would suggest reading Ron's post.