Janus Capital Group (NYSE:JNS) has decided that the world doesn't need another S&P clone exchange-traded fund, or ETF. And thank goodness for that! Instead, Janus has chosen to give us themed ETFs around health and fitness, long-term care, organics, and obesity. I'm not sure we need these any more than another S&P clone...
Love and hate
I have mixed feelings about ETFs. On the one hand, they offer investors a unique and cost-effective way to invest. On the other hand, Wall Street is doing its very best to pile into a growing business and, in the process, could end up killing the golden goose by over-saturating the ETF space. The problem isn't that there are too many similar products, though that is an issue. The problem is that fund sponsors are increasingly trying to find niche areas in which to offer a new product.
WisdomTree Investments (NASDAQ:WETF) is my normal example of this, with its fleet of hedged equity ETFs. But it's hardly alone in this effort. For example, Janus Capital has just come out with a quartet of ETFs that the world could probably survive without. And that's not the only reason to question the value of The Health and Fitness ETF (NASDAQ:FITS), The Long-Term Care ETF (NASDAQ:OLD), The Organics ETF (NASDAQ:ORG), and The Obesity ETF (NASDAQ:SLIM).
Getting past the cute ticker symbols, which I have to give Janus kudos for getting, do we really need a way to invest in cobbled together indexes of health and fitness, long-term care, organic food, and obesity stocks? The indexes on which these four ETFs are based were created by Solactive, a German index provider that makes, tracks, and publishes "tailor-made indices" for its clients. Basically, if you want a product, Solactive can make you an index. That's not a knock on Solactive, but it suggests that Janus was looking hard to find a product to create.
And I guess if you have a really strong feeling about any of these four areas then why not have an ETF dedicated to it in your portfolio. But how many themes can you really put into a portfolio? These aren't the only such products around, after all. And these types of ETFs are, by their design, very tightly focused, so you ostensibly (more on this in a moment) get diversification in the niche, but not from a broader portfolio perspective.
In other words, these types of ETFs may be just fine for a small portion of your assets, but you wouldn't want to devote too much money unless you have a very high conviction idea. The other option is to own a whole bunch of themed ETFs, so you really do achieve some amount of diversification. Prudence would suggest such an approach if these are core holdings for you.
However, I'm still left wondering what benefit investors get from trying to jump in and out of thematic funds. Sure you aren't stock picking, but the effort still kind of sounds like market timing to me. Wouldn't it be better to just buy a boring S&P clone? You might argue that you'll stick with a theme for a long time. But, let's be honest, the popularity of an investment theme can be fleeting on Wall Street.
Then there's the issue of diversification. By owning a themed fund you are inherently not diversified from a big picture perspective. But Janus' new ETFs have another diversification issue to watch out for. For example, two holdings account for roughly 40% of The Obesity ETF, Fresenius Medical Care AG (NYSE:FMS) and Novo Nordisk (NYSE:NVO). Whole Foods Market, Inc. (NASDAQ:WFM) is 20% of The Organics ETF. Real estate investment trusts Ventas (NYSE:VTR) and Welltower (NYSE:HCN) are about 40% of The Long Term Care ETF, which brings in a whole different kind of diversification issue since REITs can sometimes move quite differently from stocks. And The Health and Fitness ETF counts Nike (NYSE:NKE) as 20% of its portfolio.
These are pretty big concentrations for a pooled investment product. I'm sure there's a good reason for these weightings, such as these companies being the most important players in their respective spaces. But then why not just go out and buy the companies directly? The expenses are 50 basis points for each of these ETFs, which isn't out of line with similar ETFs and is generally cheaper than mutual funds. However, I'm not convinced that investors will be getting enough out of that cost since a very small number of holdings will be driving the portfolios' performances.
Take a pass?
Janus' new ETFs could be an interesting way to invest in the niche sectors they touch on. But I have reservations about that idea in general, unless it's only a small portion of your portfolio. Moreover, I'm not sure they really offer enough diversification to justify owning the ETF over simply buying the biggest players in the niche sectors.
From a bigger perspective, the ETFs seem like one more way to sell hot ETF products to investors - a goal driving so many fund sponsors that the ETF industry seems increasingly stretched for ideas. In the end, I don't think this quartet is worth bothering with, but I'd say that about a lot of ETFs at this point.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.