No Longer Hidden ETF Gems

January 14, 2019

Each year, a handful of newly launched ETFs break through the clutter and quickly exceed the all-important $100 million asset threshold to stay on the radar for investors.

Meanwhile, many others struggle to stay afloat and get buried in the pile behind newer alternatives and occasionally shut down a few years later. But when the rare ETFs do breakthrough, it can be instructive to understand why.

There are 11 ETFs that started 2018 with less than $50 million in assets, but due to demand, the assets for these no-longer-hidden-gem funds skyrocketed to $200 million or much more.

In January 2018, the likelihood of the WisdomTree Floating Rate Treasury Fund (USFR) reaching the $1 billion ETF club would have seemed as strong as a high school baseball player getting called up to play shortstop for the New York Yankees.

USFR had just $1 million in assets and had already passed its three-year anniversary, launching in February 2014. Yet investors sought out ultra-short-term bond products in 2018 to offset the negative impact of rising interest rates and increased market volatility.

Hauling In Assets

Last year, USFR joined other floating-rate strategies, such as the iShares Floating Rate Bond ETF (FLOT), a then $6 billion ETF, in hauling in sizable amounts of cash.

USFR’s peer, the iShares Treasury Floating Rate Bond (TFLO), also emerged from nowhere to currently exceed $600 million in total assets, despite starting 2018 with just $30 million. Both USFR and TFLO own Treasuries that provide stronger credit exposure than the corporate-bond-focused FLOT.

But here too, the interest payments of the bonds adjust to reflect changes in interest rates. Given their identical 1.8% returns, the massive jump in assets for USFR and TFLO is primarily due to inflows and not price appreciation.

 

Ticker Fund 2018 Starting Assets ($M) Current Assets ($M)
USFR WisdomTree Floating Rate Treasury 1 1,230
BAR GraniteShares Gold Trust 5 303
OMFL Oppenheimer Russell 1000 Dynamic Multifactor 13 235
KSA iShares MSCI Saudi Arabia 14 208
FLJP Franklin FTSE Japan 16 265
XSOE Wisdomtree Emerging Markets EX-State Owned Enterprises 16 237
HTRB Hartford Total Return Bond 20 505
JHSC John Hancock Multifactor Small Cap 27 311
TFLO iShares Treasury Floating Rate Bond 30 623
MJ ETFMG Alternative Harvest 45 660
CLRG IQ Chaikin US Large Cap 47 397

Source: CFRA, 1/9/2019

 

Golden Globe

Meanwhile, the 60-fold asset increase for the GraniteShares Gold Trust (BAR)—to $303 million from just $5 million—was as likely as a struggling actress/waitress winning a Golden Globe award.

The ETF debuted in 2017 with a low 0.20% expense ratio, but in October 2018, it cut its fee even further to 0.17%. Like many peers, BAR holds physical gold bars in a secure vault. The commodity industry heavyweight is the SPDR Gold Shares (GLD), which still has $33 billion in assets, but shed $1.8 billion in assets last year as investors sought cheaper alternatives; the iShares Gold Trust (IAU) charges a 0.25% expense ratio and pulled in $1.6 billion in 2018.

Other examples of unexpectedly popular ETFs are the multifactor equity ETFs Oppenheimer Russell 1000 Dynamic Multifactor (OMFL) and IQ Chaikin U.S. Large Cap (CLRG). Both launched in late 2017 in time to benefit as investors gravitated toward multifactor funds in 2018 that combine attributes used by typically more expensive actively managed equity mutual funds.

Changing Factors

OMFL started 2018 with just $13 million in assets, but currently has $241 million. Even more akin to active management than most multifactor ETFs, OMFL tracks an index that adjusts the factors it favors based on economic indicators and risk appetite. For example, in the first quarter of 2018, OMFL was tilted toward momentum, size and value factors, but shifted in April toward quality and low-volatility factors.

CLRG is more static than OMFL but rebalances annually. CFRA also finds this ETF unique among multifactor funds because it combines common value and technical inputs with growth and sentiment ones. CLRG started 2018 larger than others profiled here, but still grew its asset base more than eight times to $400 million.

While the ETFs listed above are likely still off-the-radar for many ETF investors, the ETFMG Alternative Harvest (MJ) is widely known as the only marijuana ETF available.

Marijuana’s Evolution To Legal

The fund’s nearly 15x increase in assets to $700 million from the beginning of 2018 would appear to be the benefit of legalization of marijuana in Canada and additional U.S. states in 2018. While money has indeed flowed in to this unique thematic equity strategy, it is notable that, in December 2017, the ETF was a Latin American real estate ETF with a different investment approach than it has today.

Although it changed its ticker to MJ from LARE, it was able to maintain its performance record—another strong reason prospective investors need to look beyond just past performance and see what’s inside the portfolio and what is likely to generate performance in the future.

Now, as MJ, the stocks inside include those supporting the legal production, market or distribution of cannabis products.

These funds should serve as a reminder to asset managers that there generally are surprise hidden gems buried in their product lineup.

For example, the Franklin FTSE Japan (FLJP), Hartford Total Return Bond (HTRB), iShares MSCI Saudi Arabia (KSA), John Hancock Multifactor Small Cap ETF (JHSC) and WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (XSOE) all started 2018 with less than $50 million in assets, but today have more than $200 million.

At the time of writing, neither the author nor his firm held any of the securities mentioned. Todd Rosenbluth is director of ETF and mutual fund research at CFRA, an independent research firm that acquired S&P Global Market Intelligence's equity and fund business in October 2016. He can be reached at [email protected]. Follow him on Twitter @ToddCFRA.

To learn more about ETFs rated by CFRA, visit https://newpublic.cfraresearch.com/etf/

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