McCall's Call: Assessing New Niche ETFs

May 11, 2011

Separating the wheat from the chaff when it comes to choosing new ETFs takes a bit of homework.

New ETFs continue to hit the market at a staggering pace and it’s become difficult for the average investor to keep up with the offerings.

There has been a mix of ETFs that are duMatthew D. McCallplicates of products already on the market as well as ETFs that cover niche areas that open the door to exciting new opportunities.

Today, I’ll take a look at a few of the recent ETFs that have begun trading and offer my thoughts on them for the average investor who doesn’t have the time to do the investigative research.

First To Market

As I said, ETF companies continue to slice up the market and narrow the focus of a single ETF in order to be the first to market. Global X Funds has been a master of this approach recently as it has come up with new and interesting ETF ideas.

The Global X Food ETF (NYSEArca: EATX) invests in companies around the globe that have their hands in the business of producing or supplying food. Because food prices have been increasing dramatically as demand picks up from the emerging markets, this sector has become a hot topic lately.

As much as I like the idea of EATX and believe in the philosophy of more mouths to feed in the world, the makeup of the ETF isn’t overly exciting. About half of the allocation is in the U.S. and many of the top holdings are food producers such as General Mills (NYSE: GIS) and Kraft Foods (NYSE: KFT). I’d prefer a better mix of food producers and companies that are involved in agribusiness and livestock operations. The ETF is composed of 50 stocks with an expense ratio of 0.65 percent.

The same company also recently launched the Global X Mexico Small-Cap ETF (NYSEArca: MEXS). As the name suggests, the ETF seeks to give investors exposure to small-cap stocks in Mexico through a portfolio of 28 stocks. The ETF is heavily weighted toward the consumer with about half the stocks in that sector. This is followed by industrials and financials. This ETF gives investors exposure to growth within the country, via consumers. If the global recovery continues, this could be a good option for an aggressive investor. However, we all know the problems in Mexico with drug cartels in the north and a politically detached south, so beware. The expense ratio is 0.69 percent.

Small Caps

Index IQ recently launched two ETFs covering sectors that already have ETFs available. However, the company decided to focus on the small-cap asset class and has packaged two new products.

The IQ Global Oil Small Cap ETF (NYSEArca: IOIL) seeks to track an index of global small-cap companies engaged in the oil sector. The ETF is composed of 61 energy stocks with 45 percent in the U.S. and another 12 percent in Canada.

As attractive as the ETF sounds, I do have one small qualm with the stocks in the allocation. Typically a small-cap stock has a market value of $2 billion or less. The top two holdings in IOIL are Sunoco (NYSE: SUN) and Oceaneering Intl. (NYSE: OII), which have market capitalizations of $5.12 billion and $4.35 billion, respectively. Even with the inclusion of energy stocks that aren’t, in my mind, small-cap stocks, the ETF is still attractive because it offers exposure to stocks that aren’t typically top holdings in the mainstream energy ETFs. The expense ratio is 0.75 percent.

 

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