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Summary

  • I detail four ETF ideas that meet unmet market needs.
  • The four segments I focus on are: Cyber Security, Bonds, Volatility and Dividend Growth.
  • Even though there are over 1500 ETFs/ETNs there is still room for innovation.

This week I read an article on ETF.com titled the "5 Most Needed Niche ETFs" and that got me thinking about some ideas I have for ETFs. In December 2012, I wrote an article with some new ETF ideas and one of my ideas was close to a new fund that launched in early 2013, the Credit Suisse Gold Shares Covered Call ETN (NASDAQ:GLDI). To make sure my ideas were not in the ETF pipeline, I used the ETFs in Registration section from ETF.com, which lists all the ETFs with a prospectus filed at the SEC. Below are my ideas with a description of what each proposed ETF would look like.

ETF Idea #1: Cyber Security ETF

Proposed Symbol: SAFE

This idea was also in my original article, but with the recent massive data breach at Target (NYSE:TGT), and the increased need for data security, I am baffled as to why there is no ETF that focuses on cyber security.

ETF Description: The ETF would own companies that focus on cyber security & data protection for businesses and individuals.

ETF Index: Currently the only index I could find that tracks cyber security companies is the Solactive Online Security Index. However, after looking at the holdings, I noticed some key companies missing, and I think a better way to construct a new index of cyber security companies, would be similar to what Motif Investing has done here.

Proposed Holdings: The chart below shows the allocation to cyber security stocks in the Motif Investing portfolio, which could be applied to a new cyber security index.

[Chart From Motif Investing]

ETF Idea #2: Total U.S. Bond Market Ex- U.S. Treasuries

Proposed Symbol: BXT

ETF Description: The proposed ETF would provide exposure to the U.S. bond market, but exclude U.S. Treasury bonds. The ETF would hold investment grade corporate bonds, high-yield corporate bonds, investment grade municipal bonds, high yield municipal bonds, mortgage bonds, and convertible bonds.

ETF Index: I could find no available index, therefore I created my own by looking at the allocation of bond categories in the iShares Core Total U.S. Bond Market ETF (NYSEARCA:AGG). I found that for being a "total" bond market fund, AGG has no exposure to high-yield corporate bonds, high-yield municipal bonds, and only a miniscule allocation to investment grade municipal bonds, therefore I included them in my proposed holdings below.

Proposed Holdings:

Investment Grade Corporate Bonds: 30%

Mortgage Backed Bonds: 20%

High Yield Corporate Bonds: 20%

Investment Grade Municipal Bonds: 15%

High Yield Municipal Bonds: 10%

Misc Bonds i.e. Convertible Bonds, CMBS, Preferred, etc: 5%

ETF Idea #3: Volatility Put Write ETF

Proposed Symbol: VPW

ETF Description: The proposed ETF, like GLDI, would own shares of the ProShares Short VIX Short-Term Futures ETF (NYSEARCA:SVXY), to achieve an allocation to the inverse of VIX short-term futures. I choose SVXY as the underlying holding because, as the graph below shows, the VIX is in contango (black line above zero on the graph) the majority of the time. This means the front month VIX futures contracts are more expensive than the current month, that increases costs and eats away at returns. If you look at a long-term chart of the iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX), you can clearly see the erosion in returns created by the roll cost. By having an inverse of that as SVXY does, now you can profit from that roll cost in up & sideways markets. For the income aspect of the proposed ETF, the fund would sell/"write" puts on SVXY to generate income on an underlying asset that provides no income just like GLDI does with gold.

(click to enlarge)

[Chart From The Intelligent Investor Blog]

ETF Index: There is none available that I could find, but simply put the ETF would own SVXY and sell/"write" out of the money puts on that position each month.

Proposed Holdings: SVXY

ETF Idea #4: Dividend Growth & Momentum ETF

Proposed Symbol: DGM

ETF Description: The proposed ETF would own stocks that have the qualities of dividend growth & stock price momentum.

ETF Index: I could find no available index, therefore I created my own by looking at the holdings for the PowerShares DWA Momentum Portfolio ETF (NYSEARCA:PDP) and the WisdomTree U.S. Dividend Growth ETF (NASDAQ:DGRW) to see which stocks were included in both ETFs. Those stocks that were in both ETFs would posses the qualities of dividend growth and momentum, and therefore would be the holdings for the proposed ETF and are in the table below. The index would be equally weighted and rebalanced quarterly.

Proposed Holdings:

There are 37 stocks, which were in both PDP & DGRW, and are listed in the table below.

(NASDAQ:AAPL)

Apple Inc.

(NYSE:LMT)

Lockheed Martin Corporation

(NYSE:ALK)

Alaska Air Group, Inc.

(NYSE:MA)

Mastercard Incorporated

(NYSE:APH)

Amphenol Corporation

(NYSE:MCK)

McKesson Corporation

(NYSE:BF.B)

Brown-Forman Corporation

(NASDAQ:NDSN)

Nordson Corporation

(NYSE:BLL)

Ball Corporation

(NYSE:NKE)

Nike Inc.

(NYSE:CI)

Cigna Corp.

(NYSE:PCP)

Precision Castparts Corp.

(NASDAQ:CMCSA)

Comcast Corporation

(NYSE:PII)

Polaris Industries, Inc.

(NYSE:DFS)

Discover Financial Services

(NYSE:ROP)

Roper Industries Inc.

(NYSE:DSW)

DSW Inc.

(NASDAQ:ROST)

Ross Stores Inc.

(NYSE:EAT)

Brinker International Inc.

(NASDAQ:SBUX)

Starbucks Corporation

(NYSE:ECL)

Ecolab Inc.

(NYSE:SHW)

The Sherwin-Williams Company

(NYSE:EQT)

EQT Corporation

(NASDAQ:SIAL)

Sigma-Aldrich Corporation

(NYSE:FMC)

FMC Corp.

(NYSE:TJX)

The TJX Companies, Inc.

(NYSE:GWW)

W.W. Grainger, Inc.

(NASDAQ:TSCO)

Tractor Supply Company

(NYSE:HBI)

Hanesbrands Inc.

(NYSE:TW)

Towers Watson & Co.

(NYSE:HRL)

Hormel Foods Corp.

(NYSE:UNP)

Union Pacific Corporation

(NYSE:IEX)

IDEX Corporation

(NYSE:VFC)

V.F. Corporation

(NASDAQ:JBHT)

JB Hunt Transport Services Inc.

(NASDAQ:WFM)

Whole Foods Market, Inc.

(NYSE:KSU)

Kansas City Southern

Closing thoughts

This year there have been large number of ETF launches, and I believe the ETF market is getting to the point of saturation of ideas, however I believe there are pockets of ideas that are worth looking into. I think the above ideas would fill a specific spot in the market by satisfying current unmet market segments, or providing new twists on current segments. I just wish I had the capital to start an ETF using the Exchange Traded Concepts platform to launch one or more of these funds.

Disclaimer

Source: 4 ETF Ideas That Meet Market Needs