Breaking Down First Trust's 3 New ETFs: Natural Gas, Water and Chindia

First Trust Advisors has been on an exchange-traded fund launching spree lately. On May 10, it introduced 17 ETFs on the American Stock Exchange, most of them based on quantitatively-screened AlphaDEX sector, size and style indexes. Just one day later, it launched three additional specialty ETFs on the NYSE Arca:

• First Trust ISE-Revere Natural Gas Index Fund (FCG)

• First Trust ISE Water Index Fund (FIW)

• First Trust ISE Chindia Index Fund (FNI)

The three new funds each capture unique sections of the market.

Natural Gas (FCG)
First Trust’s new natural gas ETF tracks the ISE-Revere Natural Gas Index, an equal-weighted index of 30 companies that derive at least half their revenues from the natural gas market. It is not a straight index: the index uses a three-factor quantitative screening system to select companies that it thinks will outperform the market

• Price-to-earnings ratio (the lower the better)
• Price-to-book ratio (the lower the better)
• Return-on-equity (the higher the better)

In addition, the index includes a screen that compares each company’s share price with the price of natural gas. People often criticize equity-based exposure to commodities as an inexact way to gain access to the commodity itself; this new screen should keep the index and the spot price of natural gas moving in-line.

Of course, investors who really want to tap into natural gas prices can take the direct approach and buy the recently launched United States Natural Gas ETF (UNG) from Victoria Bay Asset Management. That fund holds a rolling position in natural gas funds contracts.

FCG charges 0.60 percent in expenses, while UNG charges approximately 0.8 percent once all trading fees are included.

Water, Water Everywhere (FIW)
The First Trust ISE Water Index Fund (FIW) tracks an index of 36 companies working in the potable and wastewater industries. The fund charges 0.60 percent in expenses, and is one of three water-focused ETFs now on the market, joining the PowerShares Water Resources Portfolio (PHO) and the Claymore S&P Global Water ETF (CGW); the latter fund launched today.

A complete comparison of the funds is available here.

Ch-Ch-Ch-ChIndia (FNI)
The most unique of the three funds is the First Advisors LSE ChIndia ETF (FNI), which introduces a new buzzword into the investor’s lexicon. The Chindia fund offers balanced exposure to two of the fastest growing economies in the world, holding the 25 most highly liquid stocks domiciled in each of India and China. The fund charges 60 basis points (0.60 percent) in annual expenses.

As with the so-called “BRIC” funds, which invest in stocks from Brazil, Russia, India and China, there is no asset allocation rationale for investing in only China and India. But just as BRIC strategies have proven popular, investors will likely jump on this Chindia fund as well. (China and India? Why not?)

The fund has a heavy weighting in Information Technology (37%), followed by Financials (19%), Telecommunications (13%) and Energy (12%).

While this is the first ETF of its kind, you could conceivably cobble together similar exposure using a combination of products, such as the iShares FTSE/Xinhua China 25 ETF (FXI) and the iPath MSCI India Index exchange-traded note (INP). FNI would save you money, though, as its 0.60 percent expense ratio is lower than both FXI’s (0.74 percent) and INP’s (0.89 percent).

Comments

[David Hepworth:]

Chindia is a recently coined term referring to China and India together. Although sometimes credited to Manjeet Kriplani of Business Week, the term was first coined by Jairam Ramesh, pictured above. Mr. Ramesh is a leading Indian politician and enonomist. A fund has been created to invest in Chindia.

2008 Mar 26 08:00 PM