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ETF News And Commentary

The ETF industry continues to grow exponentially and evolve. Total assets in US listed ETFs are close to $1.5 trillion, while the number of products is more than 1,480 now. However, the industry continues to be top-heavy. 

The largest ETF SPDR S&P 500 ETF (SPY - ETF report) now has more than $145 billion in AUM, while products in next three spots--Vanguard Emerging Markets ETF (VWO), iShares Core S&P 500 ETF (IVV), iShares MSCI EAFE ETF (EFA)--each have more than $40 billion in assets.  Top 10 funds hold almost 30% of total industry assets.

Most investors continue to pour money into bigger, widely known ETFs, even though sponsors continue to struggle to come up with new, different types of products. Some of these ‘niche’ products are forced to shutter their doors due to lack of investor interest.

Larger ETFs are usually more popular with investors as most of them follow the simpler market cap weight methodology, often have lower expense ratios and ample liquidity. (Read: Buy these ETFs for brighter insurance sector outlook)

At the same time, investors should not ignore some of the ETFs that try to outperform by selecting stocks using ‘better’ or ‘enhanced’ index methodologies or focus on some ‘niche’ strategies that are otherwise not available to retail investors. Some such ETFs have been outstanding performers and are expected continue their excellent performance going forward as well.

Below we present three such ETFs that have outperformed the broader market year-to-date as well as over one year and three year periods. But they remain rather unknown due to lack of investor interest.

 

YTD

1 YR

3 YR

AUM ($, MM)

SPY

16.5%

24.1%

63.3%

145,444.5

CSD

29.3%

45.0%

102.7%

235.1

PEJ

28.4%

37.0%

107.5%

114.8

FPX

20.3%

39.5%

94.3%

85.4

Spin higher profits with Guggenheim Spin-Off ETF (CSD - ETF report)

Research shows that spun-off entities generally outperform their parents and the broader market. They typically underperform in the first few weeks of trading--presumably due to selling by institutional investors, but they recover nicely subsequently and outperform by 22% in the first year.

One of the reasons could be that investors prefer focused smaller companies more than bigger diversified ones. (Read: QE Tapering could make these bond ETFs winners)

CSD tracks the Beacon Spin-off Index that includes companies that have been spun-off within the past 30 months but not more recently than six months prior to the applicable rebalancing date. Index constituents are primarily small- and mid-cap companies.

The index is comprised of up to 40 highest-ranking stocks selected from a universe of spun-off companies, using a quantitative rules based methodology.  Each stock is given a modified market cap weighting with a maximum weight of 5%, resulting in a pretty diversified basket. The index is rebalanced semi- annually.

The product currently holds 27 securities in its basket, with an average market cap of just $5.9 million.

Top holdings include Exelis Inc., Lumos Networks and Marriott Vacations. In terms of sector allocations, Energy (23.4%), Industrials (20.9%) and Consumer Discretionary (20.4%) occupy the top three spots.

The fund charges an expense ratio of 60 basis points annually. (Read: Winning Strategies for the second half)

Consumer Strength works great for PowerShares Dynamic Leisure & Entertainment ETF (PEJ - ETF report)

Consumer cyclical sectors are among a few sectors that are expected to maintain a positive earnings growth for the second quarter.  And this comes as no surprise as consumer confidence remains near multi-year high and consumer spending has remained resilient despite sluggish economic growth.

Consumer discretionary and retail stocks have been doing pretty well in recent months as the labor market showed clear signs of healing. Further, rising housing market and surging stock market added to the “wealth effect”, resulted in rising consumer confidence. Leisure and Entertainment sub-sector within this space is also likely to benefit from the summer travel/holiday season.

Launched in June 2005, PEJ the tracks Dynamic Leisure and Entertainment Intellidex Index.

The index is comprised of 30 US leisure and entertainment companies selected on the basis of a variety of investment merit criteria, including: price momentum, earnings momentum, quality, management action, and value.

Top holdings include Liberty Media, Starbucks, Scripps Network, Time Warner and Walt Disney. Restaurants (30%), Movies and Entertainment (21%) and Hotels, Resorts & Cruise lines (18%) are the top sub-industries that the product is exposed to.

The fund charges fees of 63 basis points per year.

First Trust US IPO Index Fund (FPX - ETF report)—A Play on the Red-Hot IPO Market

IPO market has been extremely hot this year, especially in the second quarter—when a combined $13.1 billion was raised. The number of IPOs surged to 62 during the second quarter, almost double from year-ago levels and it appears that the strong momentum will continue in the second half of the year.

One of the most successful IPOs this year was by Noodles & Company, a fast-casual restaurant chain, which saw its shares surge more than 100% on the first day of trading.

FPX provides a low-risk and convenient way to profit from the US IPO market resurgence.

The product tracks the IPOX-100 U.S. Index, which is modified value-weighted price index measuring the performance of 100 largest, typically best performing and most liquid U.S. IPOs.

Currently, the product has a nice mix of sectors, with top four being Consumer Discretionary, Energy, Healthcare and Technology. In terms of individual holdings, AbbVie, General Motors and Facebook take the top three spots.  

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