New ETFs Veer From Vanilla

Todd Rosenbluth is director of ETF and mutual fund research at CFRA.

In early June, after traveling throughout the U.S., People magazine published a double-digit list of best new summer ice cream flavors from a variety of purveyors. Unfortunately, I have not independently taste-tested them.

However, some, such as Van Leeuwen’s Salted Caramel, sound like a new (better?) offering of a sweet and salty flavor many Americans have been enjoying for years. Meanwhile, Jeni’s Mango Buttermilk Frozen Yogurt might require dessert purists to be willing to explore before diving in.

CFRA thinks there were similarities to variations on existing themes in the broad suite of ETF launches last week: Some will sound similar to existing products, while others aim to break new ground.

More Flavors To Choose From

What’s clear is these are not just variations of plain vanilla.

According to Heather Bell, who tracks new products and fund filings for ETF.com, 15 ETFs offered by nine providers began trading during the business week of July 10, including 10 on July 13 alone.

While a double-digit number of funds came out the weeks of June 19 and December 26, 2016, CFRA thinks these bursts were driven by the launch of a suite of products from First Trust and Elkhorn, respectively.

Examples of these ETF products include the First Trust Emerging Markets Equity Select (RNEM) and the Elkhorn S&P MidCap Utilities Portfolio (XU).

While CFRA’s holdings-focused ETF research does not yet rank RNEM and other First Trust ETFs that came out in June, XU and the other Elkhorn midcap sector offerings are part of the 1,000 plus ETFs we cover.

For investors who worry there are too many products to keep up with, yet alone give consideration to, CFRA Research and its regularly expanding research can help sort through the growing universe.

Below, we highlight a few more of these newborn July 2017 ETFs hoping to succeed in gathering momentum and assets.

PowerShares S&P 500 Minimum Variance Portfolio (SPMV)

Investors have embraced low/minimum-volatility products in recent years, perhaps more than any other loosely defined smart-beta ETF strategy. That’s due in part to the $6.7 billion PowerShares S&P 500 Low Volatility Portfolio (SPLV) and the $13.5 billion iShares Edge MSCI Min Vol USA ETF (USMV). Though we think both solve a need for investors—exposure to U.S. equities with lower risk considerations—their approaches are different.

USMV focuses on the least volatile stocks within each sector of a large/midcap MSCI USA index and has sector constraints, while SPLV holds stocks within the large-cap S&P 500 Index that score as low risk without such guardrails.

Newly launched SPMV’s approach has similarities to USMV in that it includes sector constraints, but it’s done relative to the large-cap index. In addition, semiannual rebalance and reconstitution efforts are done at different times: February and August for the S&P minimum volatility index versus May and November for the MSCI.

As of mid-July, SPMV had more in health care assets (14%) than SPLV (7%), but less than USMV (20%). Meanwhile, SPMV had more in real estate assets (8%) than SPLV (3%) and USMV (6%). From a cost perspective, SPMV’s 0.13% expense ratio is below USMV’s 0.15% and SPLV’s 0.25%.

Time will tell if investors favor the currently lower cost product or those with greater trading volume.

Differing Sector Exposures

Source: CFRA Research

iShares Edge High Yield Defensive Bond ETF (HYDB)

iShares launched this smart-beta high-yield offering last week. It tracks a proprietary index from BlackRock, unlike more established peers. Aided by the $18 billion iShares iBoxx $ High Yield Corporate Bond ETF (HYG), iShares had 50% share of the fixed-income ETF market as of June.

A competing offering, the SPDR Bloomberg Barclays High Yield Bond ETF (JNK), has $12.5 billion in assets. HYG and JNK track different indices, but both are constructed with a market-cap-weighted approach based on the value of the bonds and not fundamental attributes.

In contrast, HYDB aims to screen out certain bonds with the perceived highest likelihood of default, with a quality slant. Then the model optimizes, in an attempt to improve risk-adjusted returns, by focusing on default-adjusted spreads, seeking value.

From a credit quality perspective, as of mid-July, smart-beta HYDB had higher exposure of assets (50%) rated B than the SPDR’s JNK offering (41%) and the iShares sibling HYG (39%), but a lower stake in bonds rated CCC (12%) than JNK (14%). HYG also had a 12% CCC weighting. HYDB has a 0.35% net expense ratio, below 0.40% and JNK and HYG both have one of 0.49%.

Credit-Rating Profiles

Sources: iShares, SSGA website, July 14, 2017

CFRA thinks of the newly launched SPMV and HYDB as more like the previously referenced Salted Caramel ice cream, while other launches from last week are more like Mango Buttermilk frozen yogurt.

ProSports Sponsors ETF (FANZ)

According to SportsETFs, a new entrant to the ETF market, research has demonstrated that investing in companies that partner with sports leagues in the U.S. represents a compelling investment opportunity.

These businesses believe they can increase brand awareness, as well as grow revenues and market share through their attachment to sports. The firm’s research also shows that partnerships with the major professional sports leagues have an influence on the purchasing decisions of fans following their favorite sports in person or on TV.

CFRA has not conducted a thorough review of the valuation and risk consideration of the portfolio. FANZ holds some stocks where we are bullish, including Amazon and FedEx, and others with valuation concerns, such as Take-Two Interactive Software (TTWO).

While FANZ is more specialized to sports, CFRA thinks there are some similarities to the American Customer Satisfaction Core Alpha ETF (ACSI), which launched in November 2016 and today contains $29 million in assets.

ACSI tracks a proprietary index using customer satisfaction scores to weight stocks within each sector. Amazon and FedEx are two such holdings, but so is CFRA-Hold-recommended BB&T; ACSI does not hold TTWO. ACSI receives a neutral CFRA ranking input for its Stars, but a positive input for the qualitative risk assessment of its holdings.

Both FANZ and the slightly older ACSI are examples of thematic products that could resonate with investors, based on their holdings, much like a novel ice cream flavor. But their approaches are less recognizable at first glance.

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 at @ToddCFRA.