The wonderful world of ETFs continues to evolve and expand. Just about any investing strategy you can think of has now been translated into an ETF, so don’t be surprised to see “Uncle Joe-Bob’s Methane Producing Swine ETF” in the near-future.
All right, maybe you won’t see that exact ETF, but a lot of interesting strategies have popped up, proclaiming themselves the ETFs to buy.
They aren’t always what they’re cracked up to be, though, because some strategies are just kind of loopy, and only serve a tiny niche of investors.
Many of these strategies aren’t even close to matching the broad market in terms of performance, but they do have some utility, and some are actually worthwhile ETFs to buy. They may provide hedges against the broad market, or offer a better rate of return than bonds but with only marginally more risk. They are, in fact, replicating various hedge-fund strategies.
Let’s take a look at three of these oddball ETFs to buy as a way of starting you down the road for additional consideration of these funds.
ETFs to Buy: IQ Merger Arbitrage ETF (MNA)
Index IQ ARB Merger Arbitrage ETF (NYSEARCA:MNA) is the first of our ETFs to buy. It makes money by investing in companies that are going to merge after a public merger announcement has been made.
The idea is that when a takeover is announced, it often means the seller is being acquired at a premium. The market, however, may not trade the stock right up to that premium because certain fears exist that the buyout won’t occur.
So the arbitrageur will go long the seller’s stock while shorting the acquirer’s stock. If the deal goes through according to plan, the target company’s stock will rise to the proposed buyout price and the acquiring company’s price will fall to reflect the ultimate final price for the deal.
The best recent example is the AT&T, Inc (NYSE:T) buyout of DIRECTV (NYSE:DTV). For more than a year, the latter was trading at an 11% to 16% discount to the buyout price.
MNA is not a blockbuster ETF. It has returned 15% over five years, but a 3% annual return is a good supplement to bonds, because arbitrage experts don’t carry much risk. In addition, M&A activity has been picking up lately.
You can own MNA for 0.76% in expenses, or just $75 per $10,000 invested.
ETFs to Buy: PowerShares Buyback Achievers ETF (PKW)
Of greater interest may be the PowerShares Buyback Achievers Fund (ETF) (NYSEARCA:PKW), which invests in a basket of companies who have reduced their overall share count by 5% or more in the preceding twelve months. It is reconstituted annually and rebalanced on a quarterly basis so it stays current.
Not surprisingly, this ETF consists of 68% large cap companies, although you may be surprised to find 25% in mid-cap companies, which aren’t often thought of as being buyback candidates.
The average P/E ratio of the stocks is 16.8, with an average market cap of $82 billion, so they really are the cream of the crop. It has reasonable expense ratio of 0.68%, especially considering it has significantly outperformed the S&P 500. Since inception in 2007, it has returned 100% versus the S&P’s 77%. PKW is also up four-fold since the financial crisis low, whereas the S&P has returned 250%.
ETFs to Buy: Guggenheim Spin-Off ETF (CSD)
There’s another surprising ETF strategy that has outperformed the broad market, and makes it one of the ETFs to buy, and that’s Guggenheim’s Claymore Beacon Spin-Off ETF (NYSEARCA:CSD).
This ETF only includes companies with market caps under $10 billion that have been spun off within the past 30 months. The definition of “spinoff” is very specific: “a spin-off distribution of stock of a subsidiary company by its parent company to parent company shareholders, or equity ‘carve-outs’, or ‘partial initial public offerings’ in which a parent company sells a percentage of the equity of a subsidiary to public shareholders.”
It has been a great strategy. Since December of 2006 when it debuted, it has returned a total of 110% vs. the S&P’s 78%. For the past five years, it has provided a total return of 147% vs. the market’s 115%. The net expense ratio is 0.66%.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
