With the seemingly endless imagination of ETF inventors, the aptly focused Patent ETF is certainly interesting and may hold promise as a market-beating ETF moving forward based on both past performance and the reasonable thesis that innovation translates into comparatively stronger financial performance for shareholders. The CLAYMORE/OCEAN TOMO PATENT ETF (OTP) focuses on companies that hold “quality” portfolios of patents, which in turn, translate into higher earnings than peer companies and broad market indices as a whole. The underlying companies are comprised of the of the Ocean Tomo 300 Patent index.
Performance vs. the S&P500:
- Since Launch (2006): -2.7% vs. -15% for S&P500
- 1 Year: 42% vs. 37% for the S&P500
- YTD: 6% vs. 7% for the S&P500
- Expense Ratio: 0.65%
Top 10 Holdings by Weighting:
(MSFT) Microsoft Corporation 4.78%
(AAPL) Apple Inc. 3.92%
(GE) General Electric Company Common 3.57%
(RDS.A) Royal Dutch Shell 3.32%
(JNJ) Johnson & Johnson Common Stock 3.31%
(BP) BP p.l.c. Common Stock 3.29%
(IBM) International Business Machines 3.10%
(T) AT&T Inc. 2.81%
(CVX) Chevron Corporation Common Stoc 2.80%
(PFE) Pfizer, Inc. Common Stock 2.80%
I couldn’t help but notice that many of the top holdings are in the Tech sector which begs the question as to whether the outperformance is due to the theme of the ETF with regard to innovation or if it’s purely a function of being overweight in Tech. However, while Tech/IT is the largest component of the ETF at 37%, Health Care comes in at 21% followed by Energy at 13%. As such, there is decent representation across sectors, and noticeably absent is the financial industry (if you consider GE’s non-financial assets since the Financial arm has declined considerably). Perhaps this lends itself to be an “anti-Financials” broad market ETF as well for those concerned about further trouble in the sector. Outside of high yielding Preferred Stocks, it’s entirely plausible that Financials will continue to encounter headline risk, especially if the Goldman Sachs (GS) SEC inquiry grows or turns into a criminal charge. Lawsuits are en route as well which doesn’t bode well for the sector. Additionally, the impact of pending Financial Reform may remain murky for some time as well. With that said, while Financials had powered S&P500 returns for so many years and still represent a sizable portion of the index, perhaps this combination of a focus on patents/innovation coupled with a lack of sizable Financials weighting is a nice way to round out an ETF portfolio.
For more insight into ETFs beating the broad market indices, check out these market-beating ETF Reviews.
Disclosure: No position in OTP.