I have a general rule about ETF investing: The more coverage an ETF gets in the press, the less of it you should buy it. The bulk of your money should be in the large, sleepy, market-cap-weighted ETFs no one writes about. Leave the market-chasing niche funds to the crazy folk.
While a good general rule, it’s altogether too blunt: There are plenty of good, small, niche ETFs out there. I thought I’d pull together 10 for your consideration.
First, a few ground rules:
- To select these ETFs, I looked for funds with less than $300 million in assets. I chose $300 million because it means that the average American has less than $1 invested in that ETF.
- I ignored liquidity concerns. These are forgotten ETFs, and by definition illiquid. Trade them with care.
- The ETFs are ranked from largest AUM to smallest. There are no quality judgments in the rankings.
- There are plenty of other good ETFs out there. This list is not meant to be comprehensive.
- I don’t own any of these ETFs. Take that for what it is.
Forgotten ETF #10: PowerShares S&P 500 High Beta ETF (SPHB | A-42)
ER: 0.25 percent
The PowerShares S&P High Beta ETF is designed for fans of the bull market. The fund owns the 100 highest-beta stocks in the S&P 500, rebalancing each quarter. It currently has a beta of 1.38 to the market, meaning it goes up 38 percent more than the market for the average move.
I love this ETF. Right now, a lot of advisors who diversified their clients into international exposures are getting grief because their portfolios are lagging “the market.” That’s what happens to diversified portfolios when the S&P 500 beats essentially every other index over the past few years. So what do you do?
The right thing to do is to stay the course. But if you need to respond, you could do worse than putting some of your U.S. equity allocation into SPHB. You’ll get simpler high-beta exposure than you would with leveraged ETFs, with an ultra-low expense ratio of 0.25 percent.
Alternatively, you could swap SPHB for your core U.S. equity exposure, reduce your overall allocation to the space and still achieve marketlike returns. There are risks to that strategy, of course: SPHB makes significant sector bets to cyclical companies, and could suffer if investors turn against cyclical firms.
In the end, I like SPHB because it does exactly what it says it does: provides high-beta exposure to the S&P 500 (as showcased by the chart below, comparing its returns against the SPDR S&P 500 (SPY | A-98). It does that at low costs and with good liquidity. If you want this kind of exposure, SPHB is a good place to look.
Forgotten ETF #9: Global X FTSE Greece ETF (GREK | C-54)
ER: 0.61 percent
The argument for the Global X FTSE Greece ETF is simple. Greece has been around for a long time, and it’s not going anywhere. If you believe that, you may want to buy in.
After all, the ETF trades at a price-to-earnings ratio of 0.75. That’s not a typo. While the S&P 500 trades at a P/E above 18, GREK trades below 1. No wonder it’s been on a tear recently, with shares up more than 50 percent in the past nine months.
Are there risks? Yessiree. The fund holds an incredibly concentrated portfolio of 21 names, with more than 35 percent of the portfolio in the top three companies alone. Plus, it’s Greece—it’s been about 2,000 years since its economy led the world.
But for the contrarian investor, you could do worse.
Forgotten ETF #8: Riverfront Strategic Income (RIGS)
ER: 0.22 percent
The RiverFront Strategic Income Fund is an odd ETF. It’s an actively managed unrestricted global bond ETF that charges a rock-bottom expense ratio of just 0.22 percent. That shockingly low fee comes in part because of a fee waiver that could expire in October 2014, but even if it did, the expense ratio would hang below 0.50 percent.
The fund is a go-anywhere bond fund, with the ability to own essentially any debt: U.S. or foreign, government or corporates, junk or investment grade. Its current portfolio loads up on short-term junk bonds, manages a more than 4 percent yield to maturity with a duration below 4. That’s pretty attractive in today’s market.
I find RIGS interesting for the same reason I find Pimco’s Total Return Bond Fund (BOND | B) interesting: The bond space is a wild and wooly market, and having a smart, active manager eyeing the market isn’t a crazy idea. I’ve been impressed by the thoughtfulness of the team at RiverFront, and the fund has performed exceptionally well, strongly outperforming BOND since inception. When you add in an ultra-low expense ratio, it’s worth a look.
Forgotten ETF #7: Market Vectors India Small-Cap (SCIF | D-49)
ER: 0.91 percent
One of the coolest things we do at ETF.com is our Alpha Think Tank. It’s a subscription newsletter that delivers the insights of 13 leading macroeconomists and political scientists—folks like Nouriel Roubini, Don Luskin, Marc Faber and Ian Bremmer—along with our picks on how to express those views using ETFs. It costs just $299/year. You can learn more about it here.
In a recent issue of Alpha Think Tank, David Kotok of Cumberland Advisors called out India as the best-positioned BRIC. Kotok thinks the potential election of a reform-minded government in India, along with the appointment of Raghuram Rajan as the governor of the central bank, positions the country for growth.
The obvious play there is the iShares MSCI India ETF (INDA | C-97), a broad-based India ETF that stocks up on the big-dog banks and technology firms that dominate India’s market. But an alternate idea is the Market Vectors India Small Cap ETF (SCIF).
SCIF’s portfolio (as you would expect) is loaded with companies you’ve never heard of, with an average market cap of just $547 million compared with $25.5 billion for INDA (which holds very few small-caps).
Small-cap exposure to emerging markets often gives you a tighter link to the growing consumer side of those economies, and that’s the case here: Consumer cyclicals make up 24 percent of SCIF, compared with just 6 percent of INDA.
If the economy in India improves and its middle class grows, those consumer stocks should do quite well. Perhaps that explains why SCIF is up more than 18 percent year-to-date, compared with just 7 percent for INDA.
I honestly didn’t know there was a legitimate small-cap India ETF out there. I’m glad to know there is.
Forgotten ETF #6: iShares MSCI Ireland Capped (EIRL | D-73)
ER: 0.50 percent
I’m of Irish heritage, so the iShares MSCI Ireland Capped ETF holds a special place in my heart. But it also holds a special place in a lot of people’s portfolio: Stocks in the great Republic of Ireland are up 84 percent in the past two years, making it the best-performing of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) over that time frame.
As an ETF, EIRL leaves a bit to be desired. It has inconsistent tracking performance and trades lightly. Its portfolio is massively concentrated in just 20 names, with a huge weight (22 percent) in the construction-focused CRH Group.
But Ireland is the first PIIGS country to exit the eurozone bailout process, and business confidence is rising. It’s easy to overlook Ireland as investors flock to sexy Spain and interesting Italy, but recent returns suggest this could be a mistake.
Note: The good news in Ireland may be priced in. The stocks in the portfolio trade at an incredible P/E of 70. But if the market stumbles a bit or earnings accelerate a lot, it could be one to watch.
Charts courtesy of StockCharts.com
This blog will continue next week with a list of five more forgotten ETFs to watch.
At the time this article was written, the author held no positions in the securities mentioned. Contact Matt Hougan at firstname.lastname@example.org.
The in-kind stock transaction used in the Duracell deal lies of at the heart of every ETF, and has the same benefit: tax efficiency.
Stock investors are used to splits, but why all the reverse splits in ETFs?
Falling gas prices and a strong buck may boost retail stocks, but the favorite ETF may not be the best play.
An alluring new bond ETF focused on China’s mainland credit market comes with a few caveats.