Wave Of Brand New ETFs Offers Fresh Access

The ETF world is a hotbed of interesting new ideas, as this week’s launches make clear.

Olly
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Managing Editor
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Reviewed by: Olly Ludwig
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Edited by: Olly Ludwig

A slew of interesting ETFs came to market this week, not least a “yieldco” ETF from Global X that aims to serve up steady dividends at a time when the bond market looks both skimpy in terms of current yields and downright scary in terms of risks of capital losses going forward.

In sum, the rarely boring ETF industry served up a total of seven launches this week, including a yieldco fund; a noncurrency-hedged Japan fund; four triple-exposure funds focused on energy producers and biotech firms; and a seventh promising to serve up outperforming companies that invest wisely in their own operations.

It all points to an ETF industry that’s more dynamic than ever, and that is the locus of the most thoughtful innovations in the entire financial services industry. A total of 92 ETFs have launched so far this year, and U.S.-listed ETF assets now total $2.163 trillion in more than 1,700 funds. That’s more than the 74 strategies launched in 2014—a year that ended with total U.S. ETF assets at $2 trillion even.

So, let’s look at this week’s launches, with a view toward isolating what’s most interesting.

Global X YieldCo ETF

The Global X YieldCo Index ETF (YLCO), a portfolio with just 20 constituents right now, will shoot off a dividend yield of as much as 3.5 percent. It’s being described by Global X as “MLP 2.0”—a reference to the way master limited partnerships have been embraced in the past few years as income replacement vehicles by investors frustrated with low yields and anxious about what happens when rates start rising.

Yieldcos, to be clear, are not master limited partnerships. They are electricity-generating entities—think solar or wind energy farms that pump kilowatts onto the grid—that are spun off by utility companies, who do, however, retain controlling stakes after the yieldcos’ initial public offerings.

Spinning those assets off enables investors to access pure-play streams of revenues these yieldcos—which are listed on public exchanges—are generating. By the way, the distributions will be taxed, for now, as returns of capital and not as ordinary income because the depreciation that yieldcos are declaring exceeds the cash flows they’re generating.

The ETF, which has a total market capitalization of about $39 billion, is sure to grow in the coming months and years as alternative energy development—particularly record-breaking installations in the solar realm—continues apace.

Translation: It’s early days, but this fund seems to be worth a closer look.

Elkhorn ‘Stock Pickers’ ETF

By some reckonings, as much as half of all inflows into ETFs are in the “smart beta” category these days, making yesterday’s launch of the Elkhorn S&P 500 Capital Expenditures Portfolio (CAPX) newsy on that basis alone.

Students of the ETF space will recognize that this fund is the first from a new firm headed by Ben Fulton. He once headed the ETF operation at Invesco PowerShares, an ETF firm that he built into a beacon of alternative indexing. Fulton in his new endeavor has surrounded himself with people he has worked with in his decades in the industry, which suggests that Elkhorn Investments has a deep bench of talent.

To cut to the chase, “CAPX” singles out 100 constituents of the S&P 500 Index that have a track record of steadily investing in their respective business and for whom those investments correlate with rising sales.

CAPX’s methodology amounts to a growth tilt of sorts, and while it is the market’s first fund designed around capital expenditures, Fulton went as far as to call the fund “the industry’s first stock picker’s ETF.” That’s a bold characterization, considering how many methodologies are already marketed as rules-based ways to access market slivers that are ripe for outperformance.

But I’ll give Fulton this: Anyone selling CAPX has a fairly straightforward tale to tell in terms of explaining the index methodology. And let’s face it, calling it a “stock picker’s ETF” is a good hook if nothing else.

The bottom line is this: It’s a rules-based approach, and time will tell if it outperforms. As far as that goes, and at just 29 basis points a year, it might be worth kicking the tires to see what the Elkhorn buzz is all about.

A Nonhedged Option

One piece of the smart-beta trend sweeping through the ETF industry is currency hedging. The launch of the WisdomTree Japan Dividend Growth Fund (JDG)—an unhedged strategy—fits right into that trend. That was not a typo. This new unhedged fund is meant to complement the previously existing WisdomTree Japan Hedged Dividend Growth Fund (JHDG).

The launch reflects the deeper question that’s emerging now around currency hedging. And that question is when should investors do it and when shouldn’t they.

This basic question may seem like a no-brainer when you consider the smashing success of the now-$18 billion WisdomTree Japan Hedged Equity Fund (DXJ | B-68) and the now-$20 billion WisdomTree Europe Hedged Equity Fund (HEDJ | B-50). Those two funds have been a godsend to U.S. investors grappling with the dollar’s strength against the yen and the euro.

But the dollar-strength trend will end, and having hedged and unhedged versions of the same portfolio is becoming more widespread in the more liquid pockets of the equity universe in order to give investors all the tools they may want and need.

Three Times The Fun

Finally, Direxion added a quartet of triple-exposure funds—two bull-and-bear pairs—focused on energy and biotech. These two areas of the market are relatively volatile, making funds like these potentially powerful tools—or weapons of financial destruction, depending on whether you’re on the right side of a trade.

The funds and their expense ratios are:

  • Direxion Daily S&P Biotech Bull 3X Shares (LABU), 1.04 percent, or $95 for each $10,000 invested
  • Direxion Daily S&P Biotech Bear 3X Shares (LABD), 0.95 percent
  • Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares (GUSH), 1.04 percent
  • Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares (DRIP), 0.95 percent

Standard caveats apply: These are great in the hands of hedge fund managers and other sophisticated investors who completely understand that these funds are rebalanced daily and are not meant to be held a long time. But they are great exchange-traded tools for hedging or for speculators on 3X steroids.


At the time this article was written, the author held no positions in the securities mentioned. Contact Olly Ludwig at [email protected] or follow him on Twitter @OllyLudwig.



Olly Ludwig is the former managing editor of etf.com. Previously, he was a financial advisor at Morgan Stanley Smith Barney and an editor at Bloomberg News. Before that, Ludwig was a journalist at the Reuters News Agency in New York.