The ETP lineup now consists of nearly 1,200 individual products with aggregate assets of more than $1 trillion. And both of those numbers continue to expand at an impressive rate. New ETFs are launched seemingly on a daily basis, while cash continues to flow out of traditional mutual funds and into exchange-traded products.
As growth has accelerated, it has become increasingly difficult for individual investors and advisors to keep track of all the exchange-traded options out there. Though smaller funds are taking in more and more assets, the ETF industry remains very top heavy; the 30 largest ETPs account for well more than half of total assets. And while the more compelling and unique products generally have a way of accumulating significant AUM, some of the appealing funds hitting the market seem to fly under the radar of investors.
Many investors and advisors abide by rules of thumb that require potential investments to have certain daily trading volumes or AUM to be deemed sufficiently liquid - a simplification that reveals a fundamental misunderstanding of ETFs. Those that utilize “liquidity screens” miss out on a number of interesting options. Below, we profile several appealing ETFs that have accumulated less than $25 million in assets. This list isn’t meant as a “buy” list in the current environment, but rather as a rundown of products that might be useful in the asset allocation process, and may warrant a closer look from investors.
Bifurcating U.S. equity markets between value and growth companies has long been the basis for popular investment strategies. Founded on the notion that certain types of companies perform well in certain environments, investors have flocked toward ETFs that segment between value companies - those with low pricing multiples and high dividend yields - and growth stocks - those with loftier pricing multiples and greater potential for future growth.
Global X recently launched two ETFs that allow investors to tilt their emerging markets exposure toward either investment style, giving investors more precise tools for molding exposure to an asset class that has become increasingly important to balanced portfolios in recent years. Historically, the performance delta between these different investment styles and “blended” funds has been significant, meaning that these ETFs may provide an opportunity to optimize emerging markets exposure depending on the economic environment.
9. Teucrium Natural Gas Fund (NAGS)
Investors looking to gain exposure to natural gas generally gravitate toward UNG, which invests in front month futures contracts and rolls exposure as the underlying holdings approach expiration. While that strategy makes sense for short term traders betting on immediate price swings, a more balanced exposure profile may be optimal for those seeking exposure over an extended period of time.
NAGS is perhaps seen as a direct competitor to UNG, but the two funds actually offer very different exposure. NAGS spreads holdings across four different maturities, with the goal of delivering a product that corresponds more closely to changes in spot natural gas prices - minimizing the impact of contango and backwardation on returns. The potentially adverse impact of the slope of the futures curve on natural gas products has been well documented, and NAGS is a unique option for approaching exposure in a different way.
8. PowerShares KBW High Dividend Yield Financial Portfolio (KBWD)
With interest rates still hovering near record low levels, investors looking for attractive current returns have been forced to get creative. Many upped exposure to junk bonds, but collapsing credit spreads have begun to cause some anxiety among those with exposure to high yield debt. Some have turned to equities as an alternative, embracing stocks of companies that make material dividend payments as a substitute for fixed income.
Few of the ETFs linked to dividend-weighted indexes or benchmarks that screen components by distributions can come even close to matching the yield of KBWD, which seeks to replicate an index consisting of approximately 24 to 40 publicly listed financial companies that are principally engaged in the business of providing financial services and products, including banking, insurance and diversified financial services in the United States. KBWD recently offered a 30-Day SEC yield of 10.4%, which is about 400 basis points higher than many junk bond funds.
KBWD falls toward the riskier end of the spectrum, as the underlying components are not the most stable names in the financial space. But for investors with the tolerance for a bit of risk and an appetite for current return, KBWD can be a nice option.
7. Rydex MSCI Emerging Markets Equal Weight (EWEM)
In recent years investors have begun to more intensely scrutinize the manner in which indexes are constructed and maintained. Many have come to the conclusion that there are some potentially serious drawbacks to cap weighting, gravitating toward alternatives such as equal weighting instead. As the name suggests, equal weighting affords equivalent allocations to each component stock, essentially forcing a disciplined approach that involves taking gains on stocks that have rallied and shifting exposure to underperformers upon rebalancing. The performance of the Rydex S&P Equal Weight ETF (RSP) last year - it beat the cap-weighted S&P 500 SPDR (SPY) by 600 basis points - was responsible for drawing increased attention to this weighting methodology.
Rydex recently introduced an emerging markets fund linked to an equal weighted benchmark, creating a potentially more attractive way to access stocks of developing economies. The index underlying EWEM contains all the same securities as the benchmark to which EEM and VWO are linked, but weightings are spread evenly instead of being determined by market capitalization. In addition to forcing a disciplined rebalancing, that approach ensures smaller allocations to mega cap stocks and a potentially more balanced sector exposure profile.
6. IndexIQ CPI Inflation (CPI)
Inflation has once again become a major concern for investors, as price increases have begun to accelerate around the world and surges in agricultural commodities have increased anxiety. Most investors looking to protect the value of their assets gravitate toward inflation-protected bonds, fixed income securities that adjust their principal prices in unison with the Consumer Price Index. Though interest in TIPS has increased tremendously - there are now eight different options in the Inflation Protected Bonds ETFdb Category - the ability for this asset class to provide adequate protection against inflation is questionable.
CPI is an ETF of ETFs that seeks to deliver real returns over the rate of inflation. Built around a core of short-term bonds, CPI also utilizes a variety of asset classes, including stocks, commodities and currencies, to achieve this investment objective. For investors concerned about the impact of inflation but not sold on TIPS as a safeguard, this fund might be worth a closer look.
Exchange-traded funds have become the preferred means of accessing gold for all types of investors, ranging from individuals with relatively small accounts to managers of billion dollar hedge funds. For those seeking exposure to gold over the long term, physically-backed products such as IAU or GLD probably make the most sense. But for those seeking to bet on a short-term swing in precious metals prices, a pair of leveraged ETFs from Direxion could be interesting options.
NUGT and DUST offer 2x and -2x daily exposure, respectively, to a benchmark comprised of gold miner stocks. Because the profitability of companies engaged in the extraction of gold depends on the prevailing market price for the precious metal, these securities tend to trade as leveraged plays on spot bullion. Adding explicit 200% daily leverage on top of the effective leverage associated with an investment in mining stocks, and the result is a pair of funds that will often exhibit significant volatility and can be powerful tools for those looking to ramp up short-term exposure to gold prices.
These products aren’t for everyone, but can be efficient ways for the risk tolerant among us to maximize short-term exposure to gold prices.
4. WisdomTree International Hedged Equity Fund (HEDJ)
When considering investments in international equity markets, many focus only on the performance of local stocks as drivers of returns. In reality, however, fluctuations in exchange rates can have a significant impact on returns realized by U.S. investors in international stocks. A weakening local currency can result in a drag on dollar-based returns, while a strengthening local currency can enhance the bottom line of U.S. investors. Whether they realize it or not, most U.S. investors have considerable exposure to exchange rate fluctuations.
WisdomTree offers a couple products that offer exposure to international equity markets but strip out the impact of changes in the value of related currencies relative to the dollar - essentially isolating the equity portion of total return. In addition to a hedged Japan ETF (DXJ), the company also offers a fund that offers exposure to the EAFE region. HEDJ can be used as an alternative to funds like VEA or EFA - which have aggregate assets of about $45 billion.
3. ProShares RAFI Long/Short (RALS)
Another underappreciated fund on our list also taps in to the opportunities for equity exposure beyond simple cap-weighting. RAFI weighting, a methodology that uses fundamental measures of firm size to determine the true economic size of a firm, has become increasingly popular with investors in recent years. There are a number of ETFs linked to RAFI-weighted indexes, essentially serving as potential alternatives to cap-weighted indexes. RALS is another product that employs the RAFI methodology, though the exposure offered is unique from long-only ETFs. The index to which RALS is linked consists of both long and short positions; stocks with a bigger market cap weight than RAFI weight are shorted, while those with a larger RAFI weight make up long positions. So this fund is essentially designed to exploit the inefficiencies of market capitalization weighing while maintaining a low correlation with equities.
RALS has only a limited operating history, but the early results have been impressive - especially considering that exposure is market neutral; the fund has gained about 3% since inception.
2. Focus Morningstar US Market Index ETF (FMU)
If you haven’t heard of FMU, that may just be because you’re a bit behind on the recent flurry of activity in the ETF space. This ETF, along with 14 other FocusShares products, are among the most recent additions to the ETF lineup. The revamped issuer made a splash in its return to the industry, claiming the title of “cheapest” ETF by debuting FMU with an expense ratio of just five basis points. On top of that, this ETF is available commission free to investors with a Scottrade account.
If you manage your money through Scottrade, FMU can be a cost-efficient way to gain access to U.S. equity markets. This ETF holds nearly 1,000 individual stocks, spreading exposure across all corners of the U.S. economy. The price tag can’t be beat for those looking to minimize expenses - especially if you’re able to avoid commission fees.
1. E-TRACS UBS S&P 500 Gold Hedged ETN (SPGH)
This ETF offers exposure to one of the most widely-followed equity benchmarks in the world - with a twist. The index to which SPGH is linked is constructed by investing equal dollar amounts in the S&P 500 Total Return Index and long positions in near-term exchange-traded COMEX gold futures contracts, with rebalancing occurring on a monthly basis. So in addition to providing exposure to U.S. equities, SPGH delivers a hedge against equity market collapses by exposure to gold.
Disclosure: No positions at time of writing.
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