These are interesting times in ETF land. In the coming months, you should see a new fund based on shares of companies that achieve most of their revenues from China. There may also soon be a substantial addition to the Powershares family of funds, which are actively managed based on a quantitative methodology. Also, the American Stock Exchange (AMEX) is feverishly working to develop a series of actively-managed ETFs. (Remember, with the exception of the Powershares, all ETFs are based on passive indices. Active management would expand ETFs into direct competition with most open end mutual funds.) And someday – who knows when – one of the long talked about gold funds might finally come to market.

As a warm up, State Street Global Advisors recently launched the new S&P 500 SPDR O-STRIP (symbol OOO). The O-Strip holds all S&P 500 Index components that trade on the Nasdaq. 

The fund was created largely in response to institutions that desired an easy way to hedge their S&P 500 based portfolios via program trading. Buying and selling the Nasdaq portion of their portfolios can be very expensive (it is actually cheaper to trade on the New York Stock Exchange, according to most studies). The OOO allows market participants to buy and sell this whole block of stocks via one trade. This capability does not come without cost; OOO charges a 0.36% expense ratio, nearly double the 0.20% charged by the Nasdaq-100 Trust (QQQ) and more than triple the 0.10% charged by the S&P 500 SPDR (SPY). However, this is still far less than it would cost to buy and sell this group of stocks individually.

As of now, the AMEX website shows that you can only trade OOO in a minimum increment of 100 shares. I have contacted AMEX to have this corrected. State Street Global Advisors, the managers of the fund, confirmed that you can buy or sell as few as one share of OOO at a time. This would be important to most retail accounts since this fund currently trades at well over $135 per share.

Although the O-Strip adds financial sector stocks (such as banks and brokers), the fund actually has a heavier weighting in technology relative to QQQ. Below you'll find a listing of the various indices' top sector weightings:

Microsoft (MSFT) and Intel (INTC) account for more than 27% of OOO's value. This compares with less than a 14% weighting in the QQQ and around 15% in the Nasdaq Composite. So, despite the addition of financial stocks, OOO is far more concentrated than many other comparable funds. The O-Strip also holds just 75 different companies. As a result, the fund is likely to be a bit more volatile than its peers. 

Not too surprisingly, the correlation among these indices is fairly high. The table below shows how closely the three Nasdaq indices track, along with the S&P 500 and the Technology SPDR (XLK).

The OOO will become an interesting product for investors to use when analyzing sector trends. Spreads between the O-Strip, the Nasdaq 100 and the Nasdaq Composite will be interesting and may provide valuable information. However, due to its high share price, and the fact that it will be used most likely as a program trading vehicle, I doubt that OOO will become a major retail product. There may be some good opportunities in it though, and I will keep an eye on it for our readers.

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