In each of the past few years, investors have had to pore through roughly 150 new exchange-traded funds (ETFs) annually in search of the one or two that really hold appeal.
As most investors have come to realize, most newly launched funds are simply copycats of existing ETFs. For example, Fidelity and Charles Schwab launched dozens of ETFs in 2013 that are virtually identical in construction to those offered by Vanguard, iShares and others. Schwab and Fidelity just want to stop funds from flowing out the door toward other asset management firms.
Yet every year also brings a handful of new and original funds that help investors to capitalize on emerging investment themes. I’ve looked at the early slate of 2014 releases and found three new ETFs that you need to know more about.
1. First Trust Dorsey Wright Focus 5 ETF (NYSE: FV)
This is a new twist for ETFs, deploying a strategy that has been used by investments firms with mutual funds and hedge funds for many years. The so-called “fund of funds” approach aims to rotate assets among funds that are showing the greatest relative strength. (To help understand this ETF's name, First Trust is a fund sponsor, and Dorsey Wright develops indices that many fund firms like to track.)
The fund had a recent major focus on First Trust ETFs in the Internet, biotech, consumer and health care categories. The 0.95% expense ratio is fairly steep, reflecting the fact that the portfolio will be rebalanced frequently. Actively managed ETFs, with their higher fees, are becoming an industry sweet spot in recent quarters, falling between low-cost passive ETFs and higher-cost actively managed mutual funds.
This fund looks well-positioned to profit from a steadily rising market, though it’s unclear how it would fare in a flat or falling market. The fund prospectus didn’t provide any information regarding back-tested performance data. I’ll give this ETF a fresh look in six months to see how it has performed.
2. PowerShares International BuyBack Achievers Portfolio ETF (Nasdaq: IPKW)
We’re big fans of the share buyback investment theme and have discussed the impressive performance of the PowerShares Buyback Achievers ETF (NYSE: PKW). Over the past five years, this ETF has risen 250%, beating the S&P 500 by nearly 90 percentage points.
The folks are PowerShares are going back to the well with an internationally focused buyback ETF that launched last month. Reflecting the fact that buybacks are more popular in some countries than others, fully two-thirds of the fund’s assets are invested in Japan (29%), the U.K. (22%), Canada (8%) and Denmark (8%). In light of the impressive trading gains delivered by U.S. firms that are buying back stock, blue chips in many other countries may soon look to hop on the buyback bandwagon as well.
This fund carries a reasonable 0.55% expense ratio, and like its domestic counterpart, only buys shares of companies that have proven their intentions by already having bought back at least 5% of shares over the prior 12 months. Such an approach avoids owning companies that simply use buybacks to offset lavish stock option grants.
3. Cambria Global Value ETF (NYSE: GVAL)
This new fund, launched by Mebane Faber’s Cambria Investment Management, applies a creative twist towards tactical allocation. (You might know Mebane as the pioneer of the Total Yield approach, which we use in our Total Yield newsletter.)
Investors are sure to pay attention to this new ETF, as the Cambria Shareholder Yield ETF (NYSE: SYLD), up more than 15% since launching last May, handily topping the S&P 500 by roughly 5 percentage points. The Global Value ETF continually scours 45 global developed and emerging markets in search of the 11 most undervalued ones. (Southern and Eastern European countries, along with Brazil, Russia and Israel, account for much of the current portfolio.)
To identify value, Mebane uses the cyclically adjusted price-to-earnings (CAPE) ratio, which some economists, such as Robert Shiller, think provides a truer measure of a company’s profit streams.
The 0.69% expense ratio is slightly above the industry average, and though back-tested results were not provided, the construction of the portfolio suggests a chance for solid outperformance.
Risks to Consider: If new ETFs don’t garner rising trading volumes and increasing assets under management in their first year, they can become a candidate for closure as fund sponsors try to thin out a crowded field.
Action to Take --> Other soon-to-launch funds you should track:
• The Global X Guru Small Cap Index ETF (Nasdaq: GURX), which adjusts its portfolio to keep focused on small-cap companies which have recently been targeted by hedge fund gurus. (Global X is also launching similar funds based on domestic and international large caps.)
• Both Global X and iShares are gearing up to launch funds focused on the Middle East, a region which has historically been underrepresented in the U.S. fund management arena.
• Ark Investments is expected to launch an ETF focused on companies working in the field of genomics. Considering the advancing age of the global population, such a portfolio should find solid appeal.
• First Trust is in the midst of launching a fund that focuses on small and mid-cap industrial firms that play up the theme of the U.S. manufacturing renaissance. The fund is set to have the ticker AIRR.