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3 Niche ETFs Crushing the Market

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The ETF industry continues to grow and evolve. Total assets in US listed ETFs exceed $1.5 trillion, while the number of products is more than 1,500 now. However, the industry continues to be top-heavy. 

The largest ETF SPDR S&P 500 ETF (SPY) now has more than $147 billion in AUM, while the top 10 funds hold almost 30% of total industry assets.(Read: 4 Unbeatble Strategies for Q4)

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.

At the same time, some ETFs that focus on ‘niche’ strategies have been outstanding performers and are worth a look as they are expected to continue their outperformance going forward. (Read: 3 Ultracheap ETFs for Value Investors)

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 Return One Year Return Three Year Return
CSD 41.8% 52.0% 105.9%
FPX 35.7% 44.2% 102.2%
PKW 32.8% 32.2% 82.7%
SPY 20.5% 19.6% 57.1%

Spin higher profits with Guggenheim Spin-Off ETF (CSD - Free Report)

 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.

The typical spinoff whose parent is in the S&P 500 underperformed the index by 2.4% over the first month, but outperformed the index by 5.6% over three months and 17.4% over 12. (Read:3 Megacap ETFs for Mega Returns)

One of the reasons could be that investors prefer focused smaller companies more than bigger diversified ones. 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 with capitalizations under $10 billion.

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 has $371 million in AUM, currently invested in 25 securities. Top holdings include Phoenix New Media, Exelis, Lumos Networks and Tripadvisor. In terms of sector allocations, Industrials, Consumer Discretionary and Energy occupy the top three spots.

The fund charges an expense ratio of 65 basis points annually. 

Play the Booming IPO Market with First Trust US IPO Index Fund (FPX - Free Report)

The IPO market has been extremely hot this year, delivering its best performance in six years—. with the number of deals priced so far totaling 160, far ahead of 109 deals priced through the same date in 2012, per Dealogic.

The main reasons for soaring interest in IPOs are an improving economy and an excellent stock market performance. Among the most anticipated upcoming offering are Twitter, Hilton Holdings and Chrysler. China’s largest e-commerce company, Alibaba is also reported to be planning an IPO in the US.

FPX provides a low-risk and convenient way to profit from the US IPO 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, IT, Energy and Healthcare. In terms of individual holdings, Facebook, AbbVie and General Motors take the top three spots.  

The product charges an expense ratio of 60 basis points.

Forget Dividends, Focus on PowerShares Buyback Achievers Portfolio (PKW - Free Report)

Most investors focus on dividend only but by doing so, they miss the bigger picture. In fact, companies in the S&P 500 spent about $3.1 trillion on buybacks from 2004 to 2012, while they paid $2.1 trillion in dividends in the same time. The trend has continued with share repurchases increasing to $118.1 billion during 2Q 2013, up 18.1% from the prior-year quarter. 

Research by Ford Equity Research, (creator of NASDAQ buyback index methodology), shows that companies that reduced their shares by at least 5% between 1975 and 2003, outperformed S&P 500 index in 24 out of 28 years. It further shows that between 2006 and 2011, companies buying back shares produced excess returns with lower volatility.  

PKW tracks the NASDAQ US Buyback Achievers Index, which is comprised of companies that have repurchased 5% or more of their common stock in the trailing 12 months.

The fund charges an expense ratio of 71 basis points currently. ConocoPhillips, Amgen and Oracle are the top holdings as of now.

A Note about Low-Volume ETFs
One of our readers had expressed concerns about low volume when I wrote about some of these ETFs earlier this year. Many investors are unfamiliar with ETF liquidity and low-volume ETFs are often ignored by investors as they connect low volume with illiquidity. (Read: The Truth About Low Volume ETFs)
The liquidity of an ETF is not determined by its trading volume but by the liquidity of underlying shares (ETFs’ holdings).  ETFs are different from stocks in this area and their trading volume should not be interpreted like stock trading volume.
At the same time, low volume does usually lead to wider bid-ask spreads, which add to the trading costs. So, these ETFs are not suitable for frequent trading. And it does make sense to use limit orders while trading in low-volume ETFs.
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