3 Overlooked Active ETFs to Broaden Market Exposure

Concentrated portfolios can help advisors broaden equity exposure beyond FAANG stocks.

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Reviewed by: Kent Thune
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Edited by: Ron Day

In ETF investing, good things often come in small packages. And sometimes, those small packages get bigger and bigger until the whole advisory industry knows them the way 20th century folks new “Cher” or “Shakira” and today’s pop culture fans know “Oprah” or “Drake.” 

For instance, the $33 billion JPMorgan Equity Premium Income ETF (JEPI) debuted back in May of 2020 and was essentially a clone of a mutual fund that already had some notoriety. Yet by the end of that year, JEPI’s assets stood at just $170 million. A relative unknown. 

The ETF market can be rough on new entrants, especially those who run styles not currently on the tip of investors’ tongues. That is where financial advisors can exploit a very important edge to assist clients. Because they are naturally immersed in the type of data, such as that found in etf.com’s data tools, to filter and identify ETFs that are not the biggest but might play a key role in portfolios.

The Case for Actively Managed ETFs Now

At a time of increasing awareness of how much of the stock market’s gains have come from a small number of stocks, there are two key factors that could make a difference in the months and years ahead. First, investors are now more familiar and comfortable with more focused portfolios. Or, at least they are very willing to hold them, given how much wealth has flooded into S&P 500 index ETFs, which are as concentrated as they have been for more than 20 years.  

And, as the market is showing increasing signs of broadening out beyond FAANG stocks, finding actively managed equity ETFs with concentrated holdings (which I define here as fewer than 40 stocks) could be timely. And dare I say, differentiating, for advisors willing to go there. 

Here are three ETFs which all aim to do just that, and whose combined assets are currently $50 million less than what JEPI was at the end of its first year. That is, these three ETFs have a total of $120 million in assets. That’s about two basis points (0.023%) as large as the $535 billion SPDR S&P 500 Trust ETF (SPY).  

Small But Mighty Active ETFs

I mentioned the rough goings for smaller ETFs in a field growing as fast as this business has. So, I might as well start the list with the $61 million Alpha Dog ETF (RUFF). This actively managed fund covers the large and mid-cap space, applying a mix of fundamental and technical analysis. It currently holds 33 stocks and is riding a strong 43% one-year total return through Wednesday’s market close.  

While RUFF is about midway through its third year of life (or about 17 in dog years), the $31 million SmartETFs Dividend Builder ETF (DIVS) is about to turn 12, having debuted back in 2012 as a mutual fund before converting to an ETF in 2021. This is an international ETF, actively managed and focused on dividend growth stocks with a three-to-five-year outlook. It currently holds 35 stocks.

And, the $29 million Bancreek US Large Cap ETF (BCUS), which debuted four months ago, holds 34 stocks, but will often restrict the portfolio to as few as 25-30 names. Interestingly, BCUS is reconstituted and rebalanced monthly, which makes it a hybrid of sorts, between index-style ETFs and active management, keeping the portfolio ideas fresh. It also caps single-stock risk at a 10% weighting. BCUS is off to a flying start in 2024, up 14% through March 20. 

ETFs Can Replace Separate Accounts

Advisors who like separate accounts and mutual funds can now look to ETFs to find a wide range of focused equity portfolios, with data and transparency that responds to the “want it now” demands of contemporary investors. These types of ETFs also make rotating among managers infinitely easier, given their intraday liquidity.  

So, it makes sense for advisors to look for something different to do what they were trained to do long ago: focus! Except in this case, focus describes the nature of the equity portfolio inside the ETF wrapper. Concentrated, under the radar, but worth consideration among the crowd. 

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.