Hits & Misses Of 7 Alpha Seeking ETFs

August 04, 2015

2. Stock Split Fund (TOFR | C-67)

On June 6, 2014, shares of Apple closed at $645, a record high at the time. The next trading day, the stock opened at $94. No, the stock didn't crash. Rather, Apple shares experienced a 7-for-1 split, a situation in which existing shareholders receive seven shares for each one they previously held.

Nearly a year later, Apple rallied to $133, the equivalent to a presplit value of $931. Did the split catapult Apple higher? Probably not. But stocks tend to split when their prices are rising, and presumably when business is doing well. That makes it a good idea to buy stocks that have recently split; thus the investment thesis behind the Stock Split Index Fund (TOFR), which tracks a basket of 30 stocks that have recently had a stock split.

Unfortunately for the fund, investors haven't bought into the stock-split thesis, with assets under management in TOFR totaling a paltry $4.88 million.

There are many reasons investors may be skeptical of the stock-split strategy. For one, the timing of stock splits is somewhat arbitrary. Management can decide to split a company's stock at any time―or not at all. Secondly, stocks tend to split at all-time highs, and buying high is not necessarily a winning strategy over the long term.

Nevertheless, TOFR has outperformed the market this year, with a 6.3 percent return. Since its inception in September of last year, the fund has also outperformed, with a gain of 11.3 percent versus 6.2 percent for SPY.

3. First Trust US IPO (FPX | B-77)

Last year's 273 initial public offerings was the "most active period of issuance since 406 companies went public in the year 2000," according to Renaissance Capital IPO Intelligence. Net proceeds totaled $85 billion on the back of a big IPO from Alibaba.

Shares of the giant Chinese e-commerce company have performed poorly since going public, but that hasn't quenched investors' thirst for hot IPOs.

Capitalizing on this hot area of the market is the First Trust US IPO ETF (FPX). The fund buys shares in companies that have recently gone public, and proceeds to hold them for no longer than four years. Rival ETF Renaissance IPO (IPO | A-53) takes a somewhat different tack, buying recently IPO'd shares and holding them for only two years. FPX has $860 million in assets, while IPO has $28 million.

The thesis behind these ETFs is that firms that have recently gone public are young, innovative and have a lot of growth ahead of them. While theory doesn't always match up with reality, in this case, it does. FPX has returned 11 percent year-to-date and 189 percent over the past five years, making it the best-performing ETF on this list in both periods.

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