There’s something about a brand new year that inspires us to strike out in bold new directions, seeking out whatever future fortune awaits us. For example, this could be the year when you break out of your conservative investing strategy and sample some of those enticing unconventional instruments that bet on volatility, commodities, or even your personal interests.
While boldness can have its rewards — most notably, potentially hefty yields — investments such as precious metals, futures, or hot technology niches often aren’t well-suited to the goals of income investors. Enter a wild new array of exchange-traded funds (ETFs) that boast a diversified play in some of the more exotic sectors while still providing liquidity since they trade over a major exchange.
ETFs typically track a basket of equities or seek to replicate the price and performance of a specific index, such as the S&P 500. These investments have become increasingly popular because many have the tax advantages of index mutual funds, and often with lower fees.
That growing popularity has resulted in a widening array of flavors: funds for volatility, managed futures, commodities, niche markets and the like. These five ETFs may be just the thing for investors seeking to walk on the wild side:
ETRACS Daily Short 1-Month S&P 500 VIX Futures ETN (NYSEArca:AAVX). Europe triggered a lot of volatility in the market last year. Since the region’s myriad woes are far from resolved — and other challenges loom — don’t be surprised to see volatility continue at least through the first half. AAVX, which launched last September, aims to reflect potential returns of an unleveraged investment in short-term futures contracts on the CBOE Volatility Index. With a market cap of just under $10 million, it’s up 49% in the past month. At about $97, the ETF has a 13-week yield of 26% and a one-month yield of 32%. Its expense ratio is on the high side at nearly 1.4.
VIX Short-Term Futures ETF (NYSEArca:VIXY). Although volatility funds have dropped substantially in the past six weeks, they’re far from skunks at the garden party. European debt concerns persist, and there are plenty of other challenges that could trigger more market volatility — especially the West’s worsening relations with Iran and the possible interruption of oil shipments through the Straight of Hormuz. VIXY measures the movements of a combination of VIX futures and aims to track VIX fluctuations over a specific, future time horizon. With a market cap of $26.6 million, VIXY is still up 55% over its July low, even after dropping about 33% last month. At about $66.50, VIXY’s six-month return of more than 55% offsets its –21.7% one-month yield. Its expense ratio is 0.9.
2x Gold Bull/S&P 500 Bear Profile (NYSEArca:FSG). Fluctuations in the price of gold have made and lost fortunes. FSG is one fund that allows investors to play the spread. The index tracks the difference in daily returns between the gold and U.S. equity markets. This is another ETF that has swung radically over the past six months, which is not surprising given the traditional relationship between stocks and precious-metal prices. With about $11 million in assets under management, FSG fell about 50% from September to December. It has regained about 15% since then. At about $27, FSG’s six-month return of 3% to 5% looks a lot better than its one-month –14% return. Its expense ratio is 0.75.
NASDAQ Global Auto Index Fund Profile (NYSEArca:CARZ). Car lovers looking for broader diversification in the sector might find this ETF appealing. It’s based on the Nasdaq OMX Global Auto Index, a modified market-cap-weighted index that tracks the performance of the largest and most liquid global automakers. With a market cap of $3.5 million, CARZ is up about 12% from its low in September and could get back on track depending on the health of the global auto market in 2012. At about $23, the ETF has a three-month return of 3.9% and a one-month return of –3%. Its expense ratio is 0.7%.
ISE Cloud Computing Index Fund Profile (NYSEArca:SKYY). If hot new information technologies are your thing, SKYY might be worth a look. Cloud computing is one of the hottest buzzwords going into 2012, and there are sound business reasons — namely cost and collaboration — for organizations to adopt the technology. SKYY is based on a modified equal-dollar-weighted index designed to track the performance of companies actively involved in the cloud-computing industry. Launched in July, the ETF has a market cap of $64 million and is up about 17% over its low in August. At about $17.40, it has a three-month return of 3.5% and a one-month return of –5.6%. Its expense ratio is 0.6%.
As of this writing, Susan J. Aluise did not hold a position in any of the investments named here.