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Two Niche ETFs Beating SPY

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The last couple of years have not been very smooth for the global markets. Besides economic troubles in Italy, Spain, Greece and Ireland, sequestration and the fiscal cliff in the U.S. had caused disruptions to the Wall Street rally.

Still, even with these issues, markets have surged higher so far in 2013. Investors have looked past global problems and focused on strong domestic data and a rebounding housing market for reasons to be optimistic over the future of the U.S. market (Top Performing ETFs of the First Quarter).

It appears that as long as the Fed continues with its massive asset purchases, none of the global upheavals can stop the Wall Street advance. In fact, stocks are within striking distance of all-time highs, though volatility has increased as of late.

Still, even with higher volatility levels, bonds remain somewhat unattractive due to their poor yields. This has pushed many into stocks, allowing investors to ride the wave higher this year.

Yet even with the exceptional performance showcased by the S&P 500 Index, there are some market segments that have actually beaten out SPY in terms of returns. These corners may be overlooked, but they are clearly capable of big gains as well (3 ETFs Beating the S&P 500).

So for investors seeking other market segment plays that are doing well in this market environment, a closer look at any of the following ETFs could be a good idea. These funds target many of the same stocks that are in SPY, but have managed to outperform thanks to a potentially superior—albeit more expensive—strategy that could continue to see outperformance in the months ahead:

PowerShares Buyback Achiever Portfolio (PKW)

Apart from returning cash in the form of dividends to shareholders, share buybacks have also become a very popular strategy in the U.S. With the U.S. finally on the growth track, corporate companies are seeing their profits rising and are therefore returning more cash to shareholders in the form of share buybacks.

Moreover, considering the current low rate environment, companies are finding borrowing debt at low rates and using this cash to buy back shares as a more attractive option than paying dividends. This is also assisting them to reduce their shares outstanding and increase earnings per share (4 Excellent Dividend ETFs for Income and Stability).

2013 is turning out to be a record year for share buybacks by U.S. companies. In February, U.S. recorded share buyback authorizations of $117.8 billion, which is much higher than $68 billion recorded a year ago. The nation had last recorded its highest authorization for share buybacks in 1985.

This gives enough reason why an investor should look for companies engaged in share buybacks but instead of investing in individual companies, the basket form makes an interesting strategy to go for. PowerShares Buyback Achiever Portfolio (PKW - Free Report) represents an intriguing choice in the space.

Investors should note that this ETF that tracks companies that have repurchased 5% or more of their common stock in the trailing 12 months has been a solid performer in 2013. The return provided by the fund is not just impressive but has remarkably beaten SPDR S&P 500 ETF (SPY).

In the year-to-date period when SPY has returned 11.42%, PKW has garnered an impressive return of 15.91%. The outperformance of the ETF is visible even in the performance of the last five years. While PKW gained 60.26%, returns from the S&P 500 ETF stood at 26.54% (How the Buyback ETF Continues to Beat SPY).

The fund manages an asset base of $354.1 million, which it invests in holdings of 209 companies. The fund charges an expense ratio of 71 basis points.

Company-specific risk is quite negligible in the fund as the concentration in the top ten holdings stands at 36.46%. Among individual holdings, Amgen, News Corp and ConocoPhillips occupy the top three holdings.

Among sector allocation, consumer discretionary companies are given the maximum weighting (35.73%) while financials and information technology companies round the total allocation to 69.35%. So it is quite obvious that the fund is biased towards certain sectors, though the fund has clearly outperformed over the long haul.

Guggenheim Spin-Off ETF (CSD)

Another strategy that seems to have gained traction among the U.S. companies is the spin-off. Large U.S. companies are segregating certain assets into separate entities with an aim to unlock value.

History shows that spin-off companies have most of the time turned out to be profitable as revealed by their returns and operating cash flow. To leverage the profits from spin-off ventures, investors can use the basket form, or ETFs, instead of investing in individual spun-off companies (3 ETF Strategies for the Second Quarter).

CSD represents a compelling choice in the space to invest in a group of spin-off companies. The most appealing thing about this ETF has been its out performance over broad benchmarks in the long term. In fact, CSD has returned 209.9% since the start of 2009 compared to a return of 85.2% of SPY.

In the year-to-date period, while SPY retuned 11.42%, CSD delivered a return of 18.89%. The fund indeed has a remarkable story of delivering strong returns and beating the broader market ETF since its inception.

CSD is the lone ETF tracking spin-off companies. The fund manages an asset base of $1.3 billion. Despite the only option available to tap the spin-off companies, CSD seems to be less popular among investors as indicated by its trading volume of 42,300 shares a day.

The ETF provides exposure to 27 securities which are mainly small and mid-cap companies. This makes the fund even more attractive as small and mid-cap companies have more potential to grow than their large cap counterparts.

The fund appears to be moderately concentrated in the top ten holdings as the percentage allocation stands at 48.49%. Among individual holdings, Fiesta Restaurant Group, Marathon Petroleum Corp and Huntington Ingalls Industries occupy the top three positions in the fund. The fund has a net expense ratio of 0.60% (3 ETF Strategies for Long Term Success).

From a sector perspective, the ETF has made double-digit allocations to energy, industrials, and consumer discretionary sectors with a share of 23.86%, 22.33% and 18.77%, respectively.

Bottom Line

Lately the spin-off strategy and stock buybacks seem to have gained momentum in the market. Fortunately, investors have CSD and PKW to play both of these trends in basket form.

While it should be noted that both are much pricier than their pure market cap counterparts, they have seen tremendous performances. This has been in both the short and long term, suggesting that CSD and PKW could be great picks for investors seeking a different way to target U.S. markets this year.

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