Exchange-traded funds have exploded into public consciousness with a popularity to match mutual funds, so it’s easy to think that a cursory look makes you a near expert. There isn’t much to the basics: These securities track a commodity, asset group (such as an index fund) or index (such as the Standard & Poor’s 500), and trade like stocks.
But scanning and spanning the globe (and the market) for more exotic ETFs requires more moxie. “If you’re going to beat the market over time, you have to do something fundamentally different,” says Charles Sizemore, chief investment officer of Sizemore Capital in Dallas and manager of two portfolios on Covestor. “You can’t beat the market by investing in something that substantially tracks it, like an S&P 500 index fund.”
Meanwhile, EY’s 2014 Global ETF Survey shows that investors are game to find these ETFs. EY, part of the Ernst & Young family, forecasts “annual growth rates of 15 to 30 percent around the globe in the coming five years.” It also expects the ETF industry to surpass hedge fund assets under management by this time in 2016.
Here, we list seven ETFs that demonstrate unique distinctions, including how they’re set up, the sector niches they occupy and their geographical bases.
Cambria Foreign Shareholder Yield (symbol: FYLD). This ETF holds stocks of companies that pay high dividends, buy back heaps of their shares and pay down debts. “It’s something of a one-stop shop for companies that treat their shareholders right and avoid the typical management traps of throwing funds away in pursuit of value-destroying mergers and other white-elephant projects,” Sizemore says. “On the upside, you’re getting high-quality companies run by disciplined management. On the downside, you’re never going to get something like a highflying social media stock.”
InfraCap MLP (AMZA). InfraCap’s AMZA is the first actively managed ETF focused on midstream energy companies operated as master limited partnerships. MLPs trade on a national exchange and must distribute all available cash to investors. “We currently view the midstream MLP sector as attractively valued,” says Jay Hatfield, InfraCap’s co-founder and president. “Additionally, we think the recent sector sell-off associated with the sharp decline in oil prices is overdone.” Although many energy stocks have been hard hit of late, AMZA has held its own. It’s down just 10 percent from a year ago and up 15 percent since January.
AlphaClone Alternative Alpha (ALFA). In this clone zone, ALFA duplicates the publicly traded equity investments of the world’s most sophisticated asset managers. “It provides access to a basket of stocks where hedge funds and institutional investors have disclosed significant exposure,” says Christian Magoon, CEO of YieldShares in west suburban Chicago, and a consultant with ISE ETF Ventures. Yet the clone need not stand alone. “ALFA could be used within a portfolio as a complement to traditional ETFs tracking indexes like the S&P 500,” Magoon says.
First Trust U.S. IPO (FPX). Here’s a way to get in on highflying initial public offerings long after they’ve started trading. “This ETF doesn’t just own IPOs; it also owns spinoffs,” says JJ Feldman, investment manager for Los Angeles-based Miracle Mile Advisors. “It rebalances quarterly and picks up the prior quarter’s IPOs and spinoffs.” It also holds IPOs for 1,000 days, “so companies like Facebook are still in the fund,” he says. Now there’s something to “like.”
Guggenheim Spinoff (CSD). Here’s another play in the spinoff world: a basket of stocks jettisoned from parent companies in the last 30 months. “The theory behind this investment strategy is that parent companies spin off assets into publicly traded companies only if they believe the stand-alone asset will realize material value going forward,” Magoon says. This fund owns a basket of roughly 40 companies, mostly in the mid-cap segment. “This may offer an attractive complement to traditional mid-cap ETFs that simply own stocks based on their market caps,” he says.
PureFunds ISE Cyber Security (HACK). Cheeky symbol aside, HACK is the world’s first cybersecurity ETF, and that’s a category poised to take off — literally. Consider this month’s headline report that Chris Roberts, a security researcher with One World Labs, allegedly hacked a jetliner’s flight controls to steer the plane sideways. HACK delivers about 30 global cyber stocks. “That’s a diversified basket of companies in this space, and HACK is likely to be an additive to most portfolio allocations,” Magoon says. HACK is a good investment “if you are really bullish on cybersecurity companies,” adds Eric R. Ervin, co-founder, president and CEO of Reality Shares in San Diego. Ervin’s company created DIVY, the first ETF that seeks to deliver long-term capital appreciation based on dividend growth, not stock price.
SPDR S&P Biotech ETF (XBI). Feldman notes that biotech ETFs, along with those in IPOs and spinoffs, have done well. And in the case of XBI, that’s exceptionally well: From a share price of $129.79 a year ago, it’s now at about $230, having nearly doubled with a solid upward climb the entire time span. And there’s still room to run, Feldman notes: “This does seem hard to believe, but with all of the innovation and new product development — combined with the never-ending mergers and acquisitions — this sector keeps moving higher.”
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7 Unique, Boutique ETFs originally appeared on usnews.com