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

November 03, 2016

BUZSprott Buzz Social Media Insights ETF
How much do you trust strangers on the internet? Enough for them to pick your portfolio? BUZ does just that, selecting stocks for its underlying exposure based on what people say about them online.

To build its index, BUZ uses proprietary algorithms to cull a variety of social media platforms for the most-mentioned U.S. stocks. Twitter, Facebook, LinkedIn, Reddit and YouTube are among the sites searched, as well as finance websites such as Seeking Alpha, Investopedia and Motley Fool. Even traditional media outlets, like the Wall Street Journal and Bloomberg, are examined.

The software then measures whether the chatter about these companies is positive, negative or neutral. Opinions are given greater or lesser weight depending on how much influence the people discussing the companies have within their communities, and how accurate they've been historically. 

The 75 stocks with the most positive sentiment scores are selected for inclusion, and weighted using opaque scoring. To tamp down risk, BUZ only considers firms with an average daily trading volume of $1 million or higher, and a market cap of at least $5 billion. That excludes all small-caps and many midcaps.

Since its index rebalances monthly, BUZ's holdings can vary widely month to month. Tech stocks—such as Twitter, Facebook, Microsoft and Alphabet—have historically dominated top holdings; unsurprisingly, the internet likes to talk about internet-related stocks.

Crowd-sourced stock ETFs are nothing new. For example, the now-closed CrowdInvest Wisdom ETF (WIZE) let users of a proprietary social platform vote on which stocks to hold. Direxion's All Cap Insider Sentiment Shares ETF (KNOW) and Guggenheim's Insider Sentiment ETF (NFO) both select stocks based on what company insiders buy. Even the Global X Guru Index ETF (GURU) and AlphaClone Alternative Alpha ETF (ALFA), which track stocks owned by leading hedge funds, use the same follow-the-crowd idea. What sets BUZ apart is the breadth of social media sources that it searches, as well as the computer algorithms it uses to search.

WFHY

WisdomTree Fundamental U.S. High Yield Corporate Bond Fund
"Junk" bonds might promise higher yields, but with them comes higher risk of financial distress—even default. Face it: Many of these companies didn't earn the label "junk" for nothing.

WisdomTree, however, offers a new smart-beta twist on the high-yield space, with a "screen and tilt" ETF that it says excises troubled companies, leaving only the good.

WFHY starts with a universe of relatively liquid U.S.-listed junk bonds. To be included, bonds must have at least $500 million outstanding, and they can't have defaulted or currently be in distress. The index then scores bonds based on how their cash flow compares with their industry sector peers—any with negative cash flow are removed.

Cash flow, says WisdomTree, can be a smoking gun regarding whether a company might eventually experience financial hardship. Firms with falling or negative cash flow often must scramble to meet debt obligations and keep their businesses running smoothly. A sustained cash crunch may hint at deeper problems.

As a liquidity screen, WFHY's index also removes the 5% of bonds from each sector with the smallest size and longest time since issuance. The index then tilts toward income, ranking bonds according to several risk factors, including default risk. This ranking serves as WFHY's weighting. Companies with higher income are weighted more heavily. In addition, no individual issuer may account for more than 2% of the index.

Screening junk bonds by cash flow isn't a new strategy: Since 2007, the PowerShares Fundamental High Yield Corporate Bond Portfolio (PHB) has done just that. However, PHB uses cash flow as just one of many fundamental screens; also, PowerShares' fund has no intentional income tilt.

AGGPIQ Enhanced Core Plus Bond U.S. ETF

As investors struggle to eke out returns in a low-rate, low-yield environment, momentum investing—a well-established strategy in the equity markets—has gained traction as a fixed-income strategy.

Essentially, momentum investing seeks to capitalize on prevailing market trends by overweighting securities that have performed well recently while underweighting poorer performers. 

With AGGP, IndexIQ offers investors a way to implement momentum strategies across several sectors of the bond market.

AGGP is a fund of funds that invests in ETFs across several U.S.-based bond sectors, including Treasurys of all maturities, investment-grade and high-yield corporate bonds, U.S. dollar-denominated emerging market debt, even mortgage-backed securities.

Funds are weighted by their total return momentum; sectors with higher momentum carry higher weighting in the index. Momentum is calculated by comparing the 45- and 90-day moving averages of each bond versus those of its sector, while also taking into account the sector's recent volatility. The index rebalances monthly.

Exposure to investment-grade credit and Treasurys is capped at 50%, while exposure to high-yield bonds is capped at 25%. Emerging market debt is capped at 5%. For what it's worth, some of the fund's highest historical weightings have been in investment-grade corporate bonds and mortgage-backed securities.

Though AGGP is one of the first ETFs to apply momentum investing to bonds, it isn't the only one. The SPDR Dorsey Wright Fixed Income Allocation ETF (DWFI) is also a fund-of-funds, momentum-factor bond ETF. However, DWFI only invests in other SPDR ETFs, whereas AGGP pulls from a wide universe of U.S. bond ETFs.

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