Hougan: 10 Great ETFs You Don't Know (Part 1)

April 25, 2014

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:

  1. 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.
  2. I ignored liquidity concerns. These are forgotten ETFs, and by definition illiquid. Trade them with care.
  3. The ETFs are ranked from largest AUM to smallest. There are no quality judgments in the rankings.
  4. There are plenty of other good ETFs out there. This list is not meant to be comprehensive.
  5. 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)
AUM: $251M
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.

For the definitive ETF Analytics report on SPHB, click here.




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