Exchange-traded funds (ETFs) have changed the face of investing.
First launched in 1993, the ETF industry has surged to more than $1.5 trillion in assets spread across more than 3,100 ETFs and exchange-traded notes (ETNs).
Nearly every conceivable strategy has been converted into an ETF. I can only imagine the financial mad scientists who are hard at work designing the latest ETFs. Unusual ETFs are meant to fill a niche in your portfolio while allowing you to capitalize on your investment ideas for the coming year.
Out of all the niche ETFs available in 2014, my favorites are those that follow the share repurchase trend and those that will benefit from a falling U.S. dollar.
Buyback programs indicate management's strong belief in the potential of the company's own shares. This confidence could be signaling bullish activity that is taking place behind the scenes. At the very least, buybacks are a clear sign that the company believes the best use of its cash is to buy back its own shares. Buybacks intrinsically increase the value of investors' shares by decreasing the number of outstanding shares, thereby lifting earnings per share (EPS).
Last year alone, the 30 companies that make up the Dow Jones Industrial Average authorized $211 billion in buybacks -- nearly three times what they allocated to research and development.
The numbers are simply staggering: authorizations for $17 billion by Home Depot (NYSE: HD), $10.8 billion by Goldman Sachs (NYSE: GS), $10 billion by Pfizer (NYSE: PFE), and $15 billion apiece by Wal-Mart (NYSE: WMT) and Cisco (Nasdaq: CSCO).
Although buybacks hit $754 billion in 2013, the number is still under 2007's record $863 billion. Buybacks should continue their pace as a way for companies to return value to shareholders throughout 2014.
The simplest way to diversify and capture the buyback trend is through ETFs. In the buyback space, there are two primary ETFs: the PowerShares Buyback Achievers Portfolio (NYSE: PKW) and the Trimtabs Float Shrink ETF (NYSE: TTFS).
As you can imagine, both of these ETFs crushed the market last year, with TTFS up 44% and PKW surging over 45%. The Buyback Achievers ETF follows the Nasdaq Achievers Index, which is built on companies that have bought back 5% or more of their shares in the past 12 months. The Trimtabs ETF holds 100 equally weighted stocks from the Russell 3000 index that are participating in a repurchase program.
Another "crazy" exchange-traded investment is the ETRACS S&P 500 Gold Hedged Index ETN (NYSE: SPGH), which is designed to profit from a rising stock market and a falling U.S. dollar.
This is the perfect ETN if the Federal Reserve does not ramp up its plans to taper its quantitative easing program, since the greenback will likely fall out of its long-term trading channel while stocks will continue to be forced higher by the easy money policies.
The way this ETN works is it follows the S&P Gold Hedged Index, which is built on the S&P Total Return Index hedged by near-term gold futures. As you might imagine, this strategy did not perform well in 2013, posting a loss of nearly 5%. However, the ETN shows an average return of nearly 9% over the past three years.
Risks to Consider: ETFs provide diversification within a particular niche. It is important to diversify across the market itself. Always use stop-loss orders and position size properly when investing. In addition, it's critical to note that the Gold Hedged ETN is lightly traded, which adds another level of risk.
Action to Take --> These ETFs are great for diversifying your portfolio. They are in no way meant to be single investments, but rather a small percentage of your total investment. Buying the Gold Hedged Index ETN makes sense if your investment philosophy includes a falling dollar and climbing equity prices for 2014, while the Buyback Achievers and Trimtabs ETFs are perfect for those who have conviction that the corporate buyback trend will continue.