The ETF industry continues to grow in size and importance. 2013 was another spectacular year for the industry with inflows exceeding $190 billion. 159 new products were launched last year, taking the total number of products to 1551, while assets under management have surged to $1.71 trillion. (Read: 3 Hot Sector ETFs for 2014)
While large, plain vanilla market cap weighted ETFs tracking the broader market or popular segments continue to be very popular with investors, there are some smaller but excellent ETFs that focus on certain 'niche' corners of the market. These ETFs provide access to some specialized strategies that are otherwise unavailable to retail investors.
Below we highlight three ‘niche’ ETFs that had a strong performance last year and look poised to outperform this year as well.
Invest Like Hedge Fund Titans with Guru Holdings Index ETF
The hedge fund industry with about $2.4 trillion in assets is accessible only to very wealthy investors as these funds generally require minimum investments of $250,000 and also have limits on cash withdrawals.
Further, hedge fund investing is expensive as they usually charge an annual asset management fee of 2% and a performance fee of 20% of fund’s profits (2 and 2 fees). Also, their performance may not justify the steep fees that they charge. (Read: 3 Niche ETFs Crushing the Market)
In 2013--a spectacular year for US stocks, most hedge funds delivered lackluster returns but some emerged as big winners.
Most investors would like to invest like George Soros, Carl Icahn and John Paulson and there are some ETFs that provide access to investing secrets of such gurus, without charging the hefty fees that their funds charge.
Global X Top Guru Holdings Index ETF (GURU - ETF report) uses a proprietary methodology to compile the best ideas from a select pool of hedge funds where the 13F information is most valuable. They exclude hedge funds with high turnover. The fund aims to generate alpha vs. benchmark equity indexes and rebalances quarterly
The product was launched in June 2012 and has attracted $541.9 million in assets so far. It charges 75 basis points in expenses per year. (See: 3 ETFs to Watch for Big Moves this year)
GURU has returned 81.0% from inception through the end of 2013, compared with 49.7% for SPY. The product returned 47.0% in 2013.
Profit from Private Equity Market’s Strong Momentum and Enjoy a Double-digit Yield
Private equity firms had a blockbuster year in 2013. According to WSJ, investors in private equity funds are expected to receive more than $120 billion for 2013, up from last year's record of $115 billion. Strong sentiment resulted in record fund flow with firms raising buyout funds totaling $143.5 billion last year, the highest level since 2008.
If the stock market continues its uptrend and interest rates do not rise sharply, then the private equity market can maintain its positive momentum. Per CNBC, Tiger 21—a group of super-rich individuals (median net worth $75 million) sees private equity as the best opportunity in 2014. (Read: Beat the cold weather with these hot sector ETFs)
Another positive factor here is the Volcker rule, which seeks to bar deposit taking institutons from proprietary trading and thus private equity firms could gain market share in the proprietary trading space. Private equity also has a low correlation to the broader market and provides portfolio diversification.
While many investors are unfamiliar with this corner of the financial market, it is definitely worth a look due to its superior performance, positive outlook and low correlation with the stock market. (See: 5 ETF Predictions for 2014)
Private equity space is generally accessible only to super-rich and institutional investors but retail investors can access this space via an ETF.
PowerShares Global Listed Private Equity ETF (PSP - ETF report) tracks the Red Rocks Global Listed Private Equity Index. The index is comprised of securities, ADRs and GDRs of 40 to 75 private equity companies.
Currently the fund has 64 holdings with U.S. PE firms accounting for 42% of holdings, followed by UK and France at 18% and 8% respectively.
Expense ratio of 2.19% is certainly high but the product sports an excellent yield of 13.5% currently. The ETF returned 37.1% in 2013.
Investors should however remember that private equity is a risky asset class and during a period of market turmoil or prolonged economic downturn this ETF may perform worse than the broader market.
During the financial crisis, private equity space and this product had a terrible performance. So, this investment will need to be monitored carefully.
Benefit from Insider Buying Trends with Insider Sentiment ETF
Academic studies have shown that insider stock transaction data can provide signals for the future direction of stocks in question since insiders know their company best and where the share price may be headed. In particular, purchase of shares by insiders is usually a strong indicator of bullish trend.
Further companies with positive earnings estimates revisions are more likely to outperform the broader market in the near future.
Guggenheim Insider Sentiment ETF (NFO - ETF report) is based on the Sabrient Insider Sentiment Index, which selects securities on the basis of favorable corporate insider buying as well as earnings estimate increases by analysts. Insider buying trends are determined from the public filings of such corporate insiders.
The fund holds about 100 securities in almost equal weights. Looking at the sector exposure, Financials (21%), Consumer Discretionary (18%) and Industrials (17%) occupy the top three spots.
The fund made its debut in September 2006 and has delivered 10.50% average annual return since inception compared with 6.95% return by the S&P 500 during index during the same period. In 2013, NFO returned 36.13%.
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