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

November 03, 2016

[Editor's Note: We are rerunning some of our best stories of the year. This article appears in our November 2016 issue of ETF Report.]

Some of this year's most innovative exchange-traded funds are ones that look at gender diversity as a way to boost corporate performance, generic drugs and even using crowdsourcing to make bets on which stocks will outperform from month to month.

ETF innovation right now is falling into two camps—one's creating thematic ETFs and the other's using smart beta, says Dave Nadig, director of ETFs at FactSet. Although thematic investing itself isn't anything new, fund construction is different than it has been in the past.

With more data available, these funds have greater focus, so their return patterns can provide a source of diversification.

"That doesn't mean it will go up," he noted.

The smart-beta ETFs have been pretty successful, but Nadig also says it's starting to become less innovative because there are so many out there now. So more and more ETF innovation is being found in thematic investment themes.

There's still room for unique products, such as ones that look at a different product structure. But innovation doesn't equal success, as the creators of the CrowdInvest Wisdom ETF (WIZE) found. The fund revolved around users voting on what stocks to include in the index by casting their bearish or bullish views on the CrowdInvest IOS mobile app, but the fund only lasted five months before closing in late September.

WIZE isn't the first unique ETF to close quickly. Nadig notes that two of the most innovative ETFs he saw in a long time—the AccuShares Spot CBOE VIX Up Shares fund (VXUP), which tracked the CBOE Volatility Index; and the inverse fund, VXDN—also closed in September due to lack of buyers.

"Finding that next great idea is particularly difficult. Even the folks at PureFunds would tell you that HACK (the PureFunds ISE Cyber Security ETF) caught on more than expected," he said. "Part of it's being in the right place at the right time with a solid product design. Certainly there's some science to it, but there's some luck."

Following are new ETFs that launched this year that the editors and writers at ETF Report deemed to be the most innovative.

SHESPDR SSGA Gender Diversity Index ETF
In the growing socially responsible fund world, SHE is the only ETF that exclusively focuses on increasing women's participation in corporate America's senior leadership.

Using the concept that companies with strong female leadership have higher returns than companies whose leadership and boards comprise mostly men, State Street created the SSGA Gender Diversity Index. It looks at the largest 1,000 U.S. companies for senior-leadership gender diversity, within their sector. Companies in the highest 10% in each sector are included, and the firms must have at least one woman on its board or as chief executive officer.

SSGA said the idea behind the index came from the California State Teachers' Retirement System's efforts on increasing the number of women in leadership positions in corporate America.

Including more women helps the bottom line, SSGA says, citing a 2015 MSCI study noting companies with strong female leadership had a 36.4% higher return on equity versus companies without a critical mass of women at the top.

MSCI defined strong female leadership as having a board of directors with at least three women or a higher percentage of women than the average in the company's country. State Street notes that MSCI's methodology for the study is different than the index's methodology, so investors shouldn't try to correlate the study's results with returns.

SSGA believes investments in companies with gender-diverse leadership may influence corporate America, and when launching the ETF, SSGA said it will direct a portion of its revenue to nonprofit organizations that help develop girls as leaders in business and science.

As of June 30, SHE's top individual holdings were Berkshire Hathaway (Class B) at 6.5%, Home Depot at 6.3% and Oracle at 4.9%. The top sectors were industrials, at 20.4% and health care, at 20%. The index is market-cap-weighted.

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