A Few Overlooked ETF Launches for Your Portfolio

Economic uncertainty and volatility in the financial markets led to a sharp slowdown in U.S. initial public offerings in 2022, but the same malaise hasn’t plagued the exchange-traded fund industry.  

There have only been 70 IPOs priced this year, according to Renaissance Capital data, down a whopping 82% from last year. In stark contrast, the number of ETF launches through the end of November was 395, only 6% fewer than in the same period a year ago.  

That’s a whole lot of ETFs for investors to comb through, so we’ve compiled a short list of some of the most compelling launches this year. 

The Standouts 

There are plenty of unoriginal funds coming to market every day with no chance of attracting investor interest. Most new funds will fail to attract any notable interest, but the payoff from a successful product can be massive, so you can’t fault issuers for trying their luck.  

Derivative products aside, after delving into this sizable group of new ETFs, I noticed a decent amount of interesting funds that stood out based on exposure, if not necessarily exceptional returns.  

NightShares 2000 ETF (NIWM) 
The fact that stocks perform better overnight than they do in the day might be familiar to those of you who closely follow financial markets. A strategy of buying stocks at the close and selling them at the open generally performs significantly better than a strategy of buying at the open and selling at the close. 

When I first heard about this “night effect,” I was intrigued, but when I learned that a simple buy-and-hold strategy outperformed both the night and the day strategies, it all became a little bit less interesting. 

Sure, the hold-overnight strategy does better than the daytime strategy, but who cares when a basic buy-and-hold-forever strategy beats them both? 

Bruce Lavine, CEO of NightShares, which issues of a handful of ETFs taking advantage of the night effect, elaborated on the strategy when I spoke to him on our Exchange Traded Fridays podcast earlier this year. He explained that a night strategy on the S&P 500 could be appealing to some investors because even though it has historically returned less than a buy-and-hold strategy, it’s delivered much less volatility. 

This chart illustrates Lavine’s point and why the “night effect” could be attractive to investors. 
 
 

What you can also see from the chart is that the night strategy on small cap stocks has both delivered higher returns and lower volatility than a small cap buy-and-hold strategy.  

For investors who are intrigued by this, NIWM may be worth a closer look.  

It’s important to note that while there are compelling arguments for why the night effect might be sustainable, past performance is no guarantee of future results.  

VanEck Digital India ETF (DGIN) 

India has long been a favorite for investors seeking opportunities in emerging markets. The country’s strong economic growth and massive population have fueled interest in India ETFs, like the $4.6 billion iShares MSCI India ETF (INDA).  

Relative to other emerging markets, India has done quite well, with a gain of 40.4% for INDA over the past five years, compared with 0.6% for the iShares Core MSCI Emerging Markets ETF (IEMG).  

For broad market exposure to India, you can’t do much better than INDA. But if you think that, like their counterparts in the U.S., tech firms in India will be the fastest-growing and most profitable businesses in the country, then a more targeted, technology-focused ETF might make more sense.  

That’s what DGIN is: It holds stocks of companies operating in the fields of technology, telecommunications and internet applications.  

While India wasn’t much of a tech powerhouse in the past, the country is quickly embracing the digital world. The country’s payments system, UPI, is seen as one of the most modern and efficient in the world.  

At the same time, numerous U.S. tech titans have invested billions of dollars in the country, seeking to capitalize on the country’s strong fundamentals. While the U.S. giants will surely benefit from India’s growth, domestic tech companies may have the most to gain from the digitization of the second-most-populous nation in the world.  

Schwab Municipal Bond ETF (SCMB) 
Muni bond ETFs are nothing new, but Schwab entering the space with an ultra-low-cost fund is noteworthy. SCMB follows the pattern of Schwab debuting its ETFs with category-low expense ratios. 

SCMB’s 3 basis point annual fee undercuts both the Vanguard Tax-Exempt Bond ETF (VTEB) and the iShares National Muni Bond ETF (MUB), which have expense ratios of 5 basis points and 7 basis points, respectively. 

Though SCMB is not novel in terms of exposure—it tracks nearly the same index as MUB—every basis point counts for fixed income investors, especially if rates ever go back to their rock bottom levels in 2020. 

BondBloxx USD High Yield Bond Consumer Cyclicals Sector ETF (XHYC) 

Like much of the fixed income markets, it’s been a lousy year for high yield bond ETFs.  

The iShares iBoxx USD High Yield Corporate Bond ETF (HYG) and the SPDR Bloomberg High Yield Bond ETF (JNK) are down around 10% a piece on a year-to-date basis.  

But what makes XHYC interesting isn’t what’s going on with junk bonds broadly right now. Rather, XHYC and its six sister funds have given investors the ability to target different segments of the junk bond space more precisely, which is something that could be useful in constructing fixed income portfolios.  

The seven ETFs track different junk bond sectors—energy, industrials, financials/REITs, telecom/media, health care, consumer cyclicals and consumer non-cyclicals.  

For a risky space like junk bonds, the ability to zero in on particular sectors could be attractive to some investors. When oil prices crash, bonds of junk-rated energy companies become extremely risky. Being able to filter out the bonds of those companies could lead to outperformance versus the broader high yield market.  

BondBloxx has plans to unveil other suites of precision fixed income ETFs. With most fixed income ETF categories already saturated with funds, that seems like a pretty solid greenfield opportunity for the issuer. We’ll see whether these ETFs will become standout launches in 2023.  

Email Sumit at [email protected] or follow him on Twitter @sumitroy2