Are These the Most Underappreciated ETFs Ever?

These hidden ETFs have tenure, strong performance, low AUM...what gives?

Reviewed by: Staff
Edited by: Ron Day

More than 3,000 ETFs trade on U.S. exchanges, and nearly 1,600 of them have been around for at least five years. Advisors and investors know that this is an industry characterized by innovation in the structure of the ETF vehicle and the range of market segments which can be accessed through those vehicles. 

It's also top-heavy, in ways that rival global stock markets—just as a small number of giant stocks soak up a lot of investor assets, so too do a relatively tight group of ETFs possess a majority of all U.S. ETF assets.  

That prompts the question: “What does an ETF need to do to get the attention of a large number of investors?” If it were all about brand name, then why are there many ETFs from the handful of dominant providers that don’t gather huge amounts of assets and are not tops in their peer groups?  

ETF Hidden Gems

And if it were all about past performance, the ETFs highlighted below might not be so understated in their stature within the ETF business. Specifically, I went hunting for ETFs that had the following characteristics:

  • At least 5 years since inception (so there’s been plenty of time for them be noticed)
  • Annualized performance since inception of at least 12%
  • Assets under management of less than $300 million
  • Three high-return ETFs that investors and advisors may have missed

The largest of the trio highlighted in this article is the $250 million Defiance Quantum ETF (QTUM), which has certainly been in the right place since its 2018 inception. It has already had four calendar years in which it has achieved a total return of at least 35%, and it's up 9% already this year. It is not a tiny fund, but with a 17.5% annualized return since inception, it is worth questioning why QTUM is not a much bigger ETF. I don’t the answer, but I’m asking the question.

The Convergence Long/Short Equity ETF (CLSE) might be the answer to the question, “if an ETF averages more than 15% a year over 14 years, and starts 2024 up 19% through early May, does it make a sound?” In terms of assets, not so much. This $84 million ETF holds more than 300 stocks, but is actively managed, with a turnover rate of more than 250%.  

That’s not out of the ordinary for an ETF like this, which practices a long-short investing strategy. Specifically, its net long exposure (the market value of long positions minus the market value of short positions) is typically between 50% and 100%. But despite that solid record, the ETF has gone relatively unnoticed. 

That could be due to the active nature of it, the long-short strategy or the fact that Convergence is not among the largest ETF issuers. But that doesn’t make the past performance accomplishment any less impressive.

This ETF Asks, “Do You Really Know What You Own?”

The five-year-old Syntax Stratified Large Cap ETF (SSPY) is a $90 million ETF, despite averaging 13.5% annually, which for an ETF with a value tilt, is uncommon for that time frame. SSPY takes the S&P 500 and re-weights it based on its proprietary, patented method it calls, “stratification” which Syntax defines as a way to determine common risks companies face, and then equally divides stocks into defined business segments.

As impressive as the growth of assets has been in the ETF industry, perhaps the next step in that evolution is that investors and advisors are able to more easily identify what they might regard as hidden gems. These examples, chosen from among scores of others with similar stories, highlight just how many ways there are to “win” with ETF investing as investors venture outside of the “usual suspects” that have captured the lion’s share of the assets.

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.