Top 5 Companies by Market Cap

There haven’t been many places for equity investors to hide over the past few months. Since hitting their highs in October of last year, the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite Index have all entered bear market territory; the financial sector is still grappling with tight credit conditions and a looming wave of Alt-A mortgage defaults; and even the commodities juggernaut has faltered in recent weeks.

When the markets turn volatile, investors tend to get defensive, heading for cash, fixed income funds and classic defensive sectors such as utilities, consumer staples and, of course, health care. While health care stocks have historically held up well during market downturns and periods of slow or negative economic growth, the sector is also a good place to be for investors looking for significant capital appreciation over the long term. This vast and varied category includes pharmaceutical and biotechnology companies, medical equipment manufacturers and health insurers. As the baby boom generation enters retirement, the future for the health care sector looks bright.

An article in this weekend's Wall Street Journal about ETFs with dwindling market caps caught our attention.  More and more ETFs seem to be trading hardly any volume these days, and many have already liquidated or announced plans to liquidate in the future.  As Wall Street usually does with everything, it seems to have gone overboard with ETFs, creating too many too fast.  Eventually only the biggest and strongest will survive.

We looked at more than 700 US ETFs and ETNs to see which ones are struggling the most with low market caps and volume.  The average market cap of all ETFs we looked at was about $816 million, but 131 (about 18%) have market caps lower than $10 million.  The market cap of the largest ETF, SPY, is also greater than the sum of the market caps of the smallest 596 (84%) ETFs.  Talk about income inequality!  The article notes that anything less than $50 million "probably loses money for the firm that sponsors it." 

Just for kicks, I set up an ETF screen that used the following criteria for the current one and three month time frames. Of all the ETFs, seven made this list.

• Above average market return.
• Top 20% of net asset value within its category.
• Highest discount to net asset value
• Performance vs. benchmark (whatever it is) >10%

Here they are - with surprises:

By Jim Wiandt

The pace of growth—both in assets and sheer number of funds—in the ETF industry over the past several years has been truly remarkable. According to the Investment Company Institute, from 2002 through the end of 2007, fund sponsors launched nearly 420 new products, and assets under management more than quadrupled, to $420 billion.

While many of the new funds were mainstream offerings based on familiar style box classifications or sector groupings such as technology, consumer staple and industrial sectors, others were more esoteric. Take XShares, for example. This sponsor is best known for its HealthShares family of funds that focus on small slices of the healthcare sector, e.g., Dermatology and Wound Care (HRW) and Metabolic-Endocrine Disorders (HHM). At the end of February, HRW and HHM had been on the market for a little over 12 months but had only attracted assets of around $2 million each.

XShares launched 19 ETFs in the health care space this year. Each of these ETFs, called "HealthShares," focuses on an exceptionally narrow field like metabolic disorders, opthalmology and auto-immune deficiency.

Considering the quick rise in sales volume of hundreds of new ETFs, the results for HealthShares so far has been quite dismal. It would appear that my early skepticism in the springtime was warranted. Six months down the road, however, I thought I'd take a second look.

I come to that last conclusion by seeing treasuries continue to strengthen against the S&P as well as gold and silver. Worst hit by credit fears, as could be predicted, are small caps, who are obviously most likely to be hit by more stringent credit standards.

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What does that mean for investors? It means keep a close eye on spreads and premiums. I glanced at the current spreads for the 18 HealthShares ETFs, and they averaged about 12 basis points at the close of trading yesterday. The day-end premiums-to-NAV were much higher, but not really applicable, as they can be thrown off if the last trade in the fund is at 3:30pm and the underlying trades through until 4pm.

Instead of the usual market cap weighting of companies in the ETF basket, the companies start with an equal weighting and will be rebalanced regularly. John Authers of the Financial Times walks through the logic of the Healthshares and cites some of the impressive numbers that suggest that XShares and its backers may well have found a product for which there will be a demand. But he cautions that private investors without specialized knowledge, however, should almost certainly avoid them except in small dosages. Perhaps investors should be required to get a prescription for HealthShares from their financial advisors. These ETFs can make you a lot of money in a short time but use with care and consider them as venture capital.

The ETF began trading on the New York Stock Exchange last week, bringing the total number of HealthShares to 17. HealthShares ETFs are organized into "Verticals" and represent specific areas of healthcare, life science and biotechnology, according to the press release.

Global Healthcare, Pharma and Biotech ETFs
iShares S&P Global Healthcare Sector Index Fund (IXJ)

Revenue Weighting

VTL Associates, a newcomer on the ETF stage, filed papers with the SEC for the right to launch three revenue-weighted ETFs: