by Aaron Levitt | May 2, 2014 12:05 pm
We’re big fans of exchange traded funds (ETFs) here at InvestorPlace.
Featuring intraday tradability and low expenses, ETFs have revolutionized the way that both institutional and retail investors build their portfolios. And since debuting in the early 1990s — with the launch of the SPDR S&P 500 (SPY) — issuance of new ETFs have exploded and now cover a diverse asset class base.
Yet, the bulk of ETF assets are in a few broad index funds. The SPY alone has nearly $160 billion in assets.
But with more than 1500 ETFs to choose from, investors may be missing out of some of the markets opportunities if they only focus on the biggest and well-known index funds. The truth is there are plenty of “weird” ETFs out there that have been great long-term performers.
Here are five of the best ETFs to buy.
Firms spin off various divisions for a multitude of reasons. Unrelated businesses have a better chance of being appreciated by the market, while troubled departments can be let go in order for a good division to shine. Whatever the case, these spinoffs can quite lucrative for investors. According to a study by Purdue University, spun-off subsidiaries have outperformed their parent companies by more than 20% on average during the first three years.
While investors can directly bet on these spin-offs, an easier way is through Guggenheim Spin-Off ETF (CSD). The $725 million fund tracks 34 different companies that have been spun-off from their parents within the past 30 months. Top holdings include refiner Phillips 66 (PSX) and organic foods producer WhiteWave Foods (WWAV). All in all, consumer names makeup the bulk of the fund, followed by industrials and energy stocks. CSD has decidedly mid-cap tilt as well.
That focus on spun-off companies has suited investors in CSD well since its inception in 2006. Since then, CSD has managed to produce a 9.3% annual return — besting the venerable S&P 500.
Expenses for CSD run at 0.65% — or $65 per $10,000 invested.
Like their spin-off brethren, initial public offerings (IPOs) have historically provided great returns for early investors. The problem is that a few IPOs skew the results — most end up being duds. While investors can try and guess which company is going to be the next Google (GOOG), the First Trust US IPO Index (FPX) makes the job easy.
FPX spreads its $479 million in assets among 100 different IPOs. The ETF’s underlying index — the IPOX-100 U.S. Index — seeks to measure the average performance of U.S. IPOs during the first 1000 trading days. Index constituents are selected based on quantitative initial screens. Currently, top holdings include biotech AbbVie (ABBV) and Facebook (FB).
The only drawback is that FPX misses out on some of the first-day “pop” associated with IPO investing. The ETF only buys stocks after they’ve been trading for at least a week.
Despite this, FPX has been a pretty impressive performer. The ETF has managed to produce an 12% annual return since its inception in 2006. And expenses only run 0.6%.
One of the cool thing about the ETF boom is that retail investors have access to wide range of fixed-income opportunities once reserved only for high-net-worth and institutional investors. The SPDR BofA Merrill Lynch Crossover Corporate Bond ETF (XOVR) is one example.
Crossover bonds are standard corporate bonds that straddle the line between junk and investment-grade. Basically, these bonds are rated at levels where the lower end of the investment grade debt meets the high end of junk grade debt — typically around Baa1 to Ba3/BBB+ to BB- credit ratings.
By betting on these crossover bonds, investors are treated to higher yields than most corporates, but generally lower risk than straight junk bonds. These bonds have also provided some of the best total returns versus their respective twins.
XOVR tracks 481 of these bonds and currently yields a healthy 4.99%. That’s more than high-rated investment grade corporates, but only slightly lower regular junk bonds.
All in all, the often-ignored XOVR ETF can be used to increase the yield of a fixed-income portfolio without having to dive deep in speculative bonds. Expenses for the ETF runs 0.3%.
Butterflies, condors, collars & spreads aren’t exactly everyday investing terms. And given that, many investors feel that options strategies are just too complicated for their portfolios. That’s a shame, as options can be a powerful tool to manage volatility or generate income.
For looking to benefit from that higher income and lower volatility, the PowerShares S&P 500 BuyWrite ETF (PBP) is a compelling fund. PBP makes writing covered calls a snap. Essentially, a covered-call is an investment tactic where the investor buys a stock or a basket of stocks tied to an index and writes call options — which gives another investor the opportunity to buy the stocks at certain price. The advantages of this are that the option premium cushions downside moves in an equity portfolio.
PBP holds all the stocks in the S&P 500 and then writes options on the index. In bear, flat or slightly rising markets, PBP should outperform the index. So far, this year that has been true. PBP has managed to nearly double the performance of the S&P 500 — all while yielding 6.41%.
But be advised: PBP has a very low average trading volume, so it may be subject to the same volatility that it seeks to offset.
Expense for PBP run 0.75%.
As many E&P firms have embraced fracking with gusto, the energy sector has been a great industry to place you bets on over the last 5 years. But when it comes to returns, only one fund really takes the cake. And no, we’re not talking about the venerable Energy Select Sector SPDR (XLE).
The PowerShares DWA Energy Momentum ETF (PXI) has beaten the pants off the XLE over the past five years — by more than seventy percentage points in total returns.
PXI — which recently underwent a name change — holds a very concentrated portfolio of just 34 energy stocks. The ETF uses various screens to identify companies that are showing relative strength or momentum and weights them accordingly. What investors are treated with is a portfolio of some of the more dynamic and fast moving frackers around. Stalwarts like Exxon Mobil (XOM) aren’t included in the ETF.
That focus on smaller energy firms has helped PXI produce a whopping 170% total return in the past five years. And with the smaller independents still leading the pack, PXI should continue to outperform its rivals going forward.
Expenses for PXI run at 0.66%.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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