ETFs and Your Portfolio: 5 Newbies Worth Considering

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Includes: AND, ASEA, FONE, HDGE, SCHH
by: Frank J. Constantino

The proliferation of exchange traded funds over the last several years has brought investors many new and exciting ways to enter the market. Investors can now have access to areas of the market that were once reserved for those with only the highest amount of capital. There are nearly 1,200 ETFs now trading, with many more slated to launch this year. With all of the benefits ETFs bring to investors also comes risk. It is important for investors to know what they are buying when they buy a fund. Research is the key to investor's success with the funds. With that said, I would like to review a few of the newest ETF products that have been brought to the market in 2011.

Schwab US REIT ETF (NYSEARCA:SCHH)

Real Estate Investment Trusts can be an important component of an investor's portfolio. There are now many ways to invest in REITs, including individual securities, mutual funds, and ETFs. REITs have performed well this year. The Vanguard REIT ETF (NYSEARCA:VNQ), a competitor to this one, is up more than 30% over the last twelve months. SCHH was launched on January 13, 2011. The fund is intended to track the performance of the Dow Jones U.S. Select REIT Index. It invests in a variety of REITS, with most holdings falling into the categories of specialized, retail, residential, and office. The fund has a very low, 0.13%, expense ratio. Alternatively, investors may want to consider the Vanguard REIT ETF, which practically mirrors the holdings of SCHH. Vanguard also charges 0.13% for its REIT ETF. Investors should check with their brokerage firm to see if either fund may be traded commission-free. SCHH has not yet paid a distribution to determine a distribution rate.

SCHH Top Ten Holdings

Name Ticker Percent Weighting
SIMON PROPERTY GROUP INC SPG 9.97%
VORNADO REALTY TRUST VNO 5.11%
PUBLIC STORAGE PSA 4.97%
EQUITY RESIDENTIAL EQR 4.82%
HCP INC HCP 4.25%
BOSTON PROPERTIES INC BXP 4.15%
HOST HOTELS & RESORTS INC HST 3.92%
AVALONBAY COMMUNITIES INC AVB 3.12%
PROLOGIS PLD 2.85%
VENTAS VTR 2.78%
Click to enlarge

Click here for fund information and prospectus

First Trust Nasdaq CEA Smartphone Index Fund (NASDAQ:FONE)

Mobile and internet-connected devices may be the hottest segment of technology since the internet itself. Investors wanting exposure to handset and part makers of smartphones may want to consider this ETF. Many of the companies do not trade on U.S. exchanges and are harder to invest in individually.

FONE seeks to track the performance of the Nasdaq OMX CEA Smartphone Index. According to the fund's prospectus, FONE includes companies primarily involved in the building, design, and distribution of the handsets, hardware, software, and mobile networks associated with the development, sale, and usage of smartphones. The fund was launched on February 18, 2011. FONE will pay distributions semi-annually and has an expense ratio of 0.70%.

FONE Top Ten Holdings

Name Ticker Percent Weighting
SANMINA-SCI CORP SANM 3.51%
COMPAL COMMUNICATIONS 8078.TW 3.20%
CELESTICA INC CLS 3.00%
HTC CORP 2498.TW 2.76%
BENCHMARK ELECTRONICS INC BHE 2.75%
MOTOROLA SOLUTIONS INC MSI 2.74%
RESEARCH IN MOTION RIMM 2.70%
SAMSUNG ELECTRONICS CO LTD 005930.KS 2.63%
LG ELECTRONICS INC 066570.KS 2.59%
APPLE INC AAPL 2.58%
Click to enlarge

Click here for fund information and prospectus

Global X FTSE Andean 40 ETF (NYSEARCA:AND)

Even with recent outflows, emerging markets have been a hot sector for investors over the last two years. Many investors are now looking for places outside of the typical BRIC (Brazil, Russia, India, and China) countries to invest for growth.

Global X launched the Andean 40 ETF on February 3rd, 2011. The fund seeks to track the performance of the FTSE Andean 40 index. The fund invests in the 40 largest companies in Chile, Colombia, and Peru. The individual country weightings are approximately 49% in Chile, 29% in Colombia, and 22% in Peru. The fund's largest sector is basic materials, making up 28% of holdings. Financials and Oil & Gas also make up a large portion of the holdings. The Andean 40 fund has an expense ratio of 0.72%.

AND Top Ten Holdings

Name Ticker Percent Weighting
SOUTHERN COPPER CORP SCCO 8.95%
CIA DE MINAS BUENAVENTUR-ADR BVN 7.86%
PACIFIC RUBIALES ENERGY CORP PRE 5.06%
ECOPETROL SA-SPONSORED ADR EC 4.95%
BANCOLOMBIA S.A.-SPONSORED ADR CIB 4.64%
CREDICORP LTD BAP 4.57%
S.A.C.I. FALABELLA FALAB 4.53%
EMPRESAS COPEC SA COPEC 4.52%
EMPRESA NAC ELEC-CHIL-SP ADR EOC 4.41%
QUIMICA Y MINERA CHIL-SP ADR SQM 4.26%
Click to enlarge

Click here for fund information and prospectus

Global X FTSE ASEAN 40 ETF (NYSEARCA:ASEA)

The Global X ASEAN 40 ETF is another new emerging market fund. The fund was launched on February 17, 2011. ASEA seeks to track the performance of the FTSE/ASEAN 40 Index. The fund invests in 40 largest companies in the ASEAN region; Indonesia, Philippines, Singapore, Malaysia, and Thailand. The individual country weightings are Singapore 41%, Malaysia 33%, Indonesia 15%, Thailand 10.5%, and Philippines 0.6%. Nearly 44% of the funds assets are in financials. Telecommunications and industrials represent approximately 15% each. The fund is small, with net assets of approximately $1.5 million. ASEA has an expense ratio of 0.65%.

ASEA Top Ten Holdings

Name Ticker Percent Weighting
DBS GROUP-HOLDINGS LTD DBS 5.87%
OVERSEA-CHINESE BANKING CORP OCBC 5.43%
SINGAPORE TELECOM ST 5.41%
ASTRA INTERNATIONAL TBK PT ASII 5.34%
UNITED OVERSEAS BANK LTD UOB 5.04%
PUBLIC BANK BHD-FOREIGN MKT OTC:PBLOF 4.49%
CIMB GROUP HOLDINGS BHD CIMB 4.47%
MALAYAN BANKING BHD OTCPK:MLYBY 4.44%
SIME DARBY BERHAD SIME 4.04%
KEPPEL CORP LTD KEP 3.26%
Click to enlarge

Click here for fund information and prospectus

AdvisorShares Active Bear ETF (NYSEARCA:HDGE)

Actively managed ETFs are relatively new to the industry. Like mutual funds, they have a manager that actively manages the assets based on the funds stated purpose. Generally, actively managed ETFs have a higher expense ratio than their index counterparts, but less than a mutual fund. In addition they offer investors the flexibility to trade them throughout the day. Some actively managed ETF's try to replicate hedge fund strategies. Some may invest both long and short. Others may only short stocks.

The AdvisorShares Active Bear ETF is a short-only ETF. The fund focuses on shorting stocks that the manager believes have poor earnings quality or "aggressive" (those intending to mask operational deterioration) accounting practices. The fund is managed by John Del Vecchio and Brad Lamensdorf. According to a recent Barron's article, Mr. Del Vecchio previously worked for David Tice, founder of the Prudent Bear Fund (BEARX). HDGE is the first actively managed short-only ETF. Its closest competitor is, in fact, the Prudent Bear Fund.

The largest short position in HDGE is Kohl's due to deteriorating operating and free cash flow margins. The fund generally holds between 24 and 36 short positions and may hold up to 20% in cash. Because the fund is actively managed, performance may not suffer as bad when markets are going up. HDGE has an expense ratio of 1.85%. Though still small, it already has close to $35 million in net assets. Investor's can use HDGE in a long portfolio to hedge their risk against market declines.

HDGE Top Ten Holdings

Name Ticker Percent Weighting
KOHLS CORPORATION KSS -4.68%
JUNIPER NETWORKS JNPR -4.05%
STAPLES INC SPLS -3.83%
WHIRLPOOL CORP WHR -3.54%
WMS INDUSTRIES INC WMS -3.48%
VMWARE VMW -3.22%
AVON PRODUCTS INC AVP -3.15%
BALLY TECHNOLOGIES INC BYI -3.11%
KENNAMETAL INC KMT -3.06%
VALASSIS COMMUNICATIONS INC VCI -2.98%
Click to enlarge

Click here for fund information and prospectus

2011 looks to be a big year for ETF launches. There are many new ETFs in the pipeline. With so many new types of funds coming to market, it is easy for investors to be confused. Many funds look promising, only to reveal that they can't properly track an index. Some funds are simply inappropriate for most investors.

This is not an exhaustive review of the five funds above. Investors need to do thorough research on a fund before they invest in it. Many times I prefer to research a fund's holdings and simply buy some of the stocks that are in the fund. The five funds listed above are not leveraged and they do not invest in futures. I prefer to stay away from leveraged funds and funds investing in futures. There are too many nuances in the performance of those funds to properly predict an outcome. Investors should note, because the ETFs above are new, they are small and can be thinly traded. This review can serve as a starting point for further research on some of the new ETF products coming to market in 2011.

Disclosure: I am long HDGE.