Best Of 2016: This Year's Most Innovative New ETFs

November 03, 2016

WTRXSummit Water Infrastructure Multifactor ETF
Investing in water isn't a new idea. After all, there are four global water ETFs already trading, with the PowerShares Water Resources Portfolio ETF (PHO) being the oldest and largest.

What makes WTRX stand out is that it takes a smart-beta approach to its investment theme, whereas the other four water ETFs are mostly cap-weighted funds. The ETF is based on the Summit Zacks Global Water Index, which tracks the performance of about 30-50 publicly listed U.S. and international companies dedicated to the global water industry.

WTRX's index uses a proprietary methodology based on fundamentals to evaluate and select water companies. The index selects companies based on their yield and risk/return profile and is rebalanced quarterly. Geography also plays a role, and while it seeks to be globally diversified, it gives a greater importance to yield and the risk/return profile.

The fund divides its holdings into two groups—water utilities and water industrials—and applies a three-factor model to each. For water utilities, the fund focuses on enterprise value/EBITDA, price-to-earnings ratio and return on equity. Water industrials include water utility line construction, implement/irrigation equipment, water purification and treatment chemicals. The three factors for this group are P/E ratios, gross margin and return on invested capital.

Based on those factors, the top 50% are selected. Overall, 35% of the portfolio's total weight goes to the utilities segment and 65% to the industrials segment, with individual position weights determined by dividend yield.

GNRXVanEck Market Vectors Generic Drugs ETF
Health care ETFs are popular, and within this sector, there are about six ETFs that focus on pharmaceuticals, but GNRX stands out for being the only one that focuses on generic drug manufacturers.

With a push to lower health care costs, and more people around the world taking some sort of prescription drug, GNRX expects this segment of the pharmaceutical industry to grow as people seek out lower-cost drugs as an alternative to pricey name brands. There are 80 different holdings in GNRX, versus the 25 in the VanEck Vectors Pharmaceutical ETF (PPH), which gives it more diversity.

Most pharmaceutical funds are focused on developed markets, where people can still pay for name-brand drugs, but GNRX has exposure to emerging markets, where consumers can more easily afford generic drugs. IMS Health says, as a percentage of drugs distributed globally, spending on generics is expected to increase to 46% in 2018 from 40% in 2013, with emerging markets likely to make up much of that growth.

The ETF is based on the Indxx Global Generics & New Pharma Index, which tracks companies that receive—or could receive—a major portion of their revenues from the generic drug industry, or that have a primary business focus on the generic drug industry.

With the focus on generic drugs versus name brands, GNRX could benefit from the rise of biosimilar drugs. These are biologic medical products that are approved by the U.S. Food and Drug Administration based on showing they are highly similar to another FDA-approved product, have no meaningful difference in terms of safety and effectiveness, and can be made when the original product patent expires.

WIZECrowdInvest Wisdom ETF
The idea that groups can be smarter than the smartest people in them was the basis for WIZE, which was the only crowd-sentiment-weighted ETF. Unfortunately, investors didn't crowd to this fund, and it closed on Sept. 27 of this year.

CrowdInvest said WIZE was a smart-beta alternative to the broad-based market index ETFs. The ETF was based on the CrowdInvest Wisdom Index, which comprised U.S.-listed stocks weighted by crowd sentiment. Users voted on what stocks to include in the index, by casting their bearish or bullish views on the CrowdInvest IOS mobile app. Stocks were also weighted by users' sentiment.

The methodology included all U.S.-listed stocks with an average daily volume of more than $15 million over the preceding 20 days. The top 35 stocks included in the index would be ranked in order of percentage of net long votes, and weightings for each of the constituents were based on their ranking in the monthly vote. Minimum rankings were 1% and the maximum was 4.9%.

If not enough users participated in the poll, the index would choose the top 35 eligible stocks by market cap and would equal-weight the portfolio.

The index would rebalance monthly, and the index provider would rebalance each holding in accordance to the results of the monthly vote. Up to four holdings could be replaced, based on a set of predetermined rules.

At the time of closing, the fund's top sectors were consumer cyclical, at 24%; and technology, at 21%. The top five holdings—all at 4.90%—were AGN, HRB MS, Oracle and VFC.

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