Most people tend to forget this, (myself included,) but ETFs can sometimes present great opportunities for value investments. That’s because they represent an entire sector that may be out of favor, and offer investors an opportunity to climb in for market-beating returns.
I like to comb through what I call “non-intuitive ETFs”, which are ETFs that invest in a sector that isn’t especially popular at the moment. immediately might not immediately come to mind.
However, one has to be careful not to grab an ETF that sounds too “cool” or cutting-edge, because it may mean some very illiquid securities are involved and you want to stay away from those.
Instead, I look for ETFs that are structured in a creative way to distinguish them from other ETFs that are in a similar sector.
Here are three unusual ETFs worth considering.
iShares MSCI Europe Fincls Sctr Indx Fd (EUFN)
The iShares MSCI Europe Fincls Sctr Indx Fd (EUFN) is an ETF tied to large financial institutions over in Europe. EUFN has 113 holdings, yields a very respectable 3.3%, and has a reasonable expense ratio of 0.48%, or $48 per $10,000 invested.
Europe has been in real economic turmoil. I think investors look at Greece and Spain and have bolted on investing in the region. However, I think investors that are scared of what they read on a macro level may be missing out on a turnaround over there.
The European Central Bank finished its Asset Quality Review to find that banks are in solid shape, meaning they should begin lending more than they have been. Other ECB policy initiatives are only going to help the banks and financial institutions.
I think European banks are likely to recover the same way that U.S. banks have, which will mean higher stock prices and higher prices for EUFN.
WisdomTree Global Real Return (ETF)
The WisdomTree Global Real Return (ETF) (RRF) is a $4.2 billion ETF with a generous distribution yield of 3.6%.
RRF is a bit of an odd duck as far as ETFs go. It invests in a mix of inflation-linked securities and debt issuers located all over the world, including the U.S. It has 35% exposure to “Global Linkers”, which are like U.S. TIPS (which make up another 30% of its holdings), 16% in investment grade corporate debt, 10% ETFs, and 8% commodities.
As far as duration, 24% of RRF’s holdings have a 0 to 2 year maturity, while 35% are 5-10 years, and 32% are 10 years or more. And 55% of those assets are rated AAA or better.
The fund has drastically underperformed the market and has actually declined 1.9% since inception. So why consider it at all?
I think you consider it only as a hedge against inflation — which is higher than everyone thinks, according to the Chapwood Index. In that case, the ETF price will catch up to the NAV and boost your return while you get a hefty distribution.
iShares Commodities Select Strategy ETF (COMT)
The iShares Commodities Select Strategy ETF (COMT) has 190 holdings and a 2.4% annualized yield. This $16 billion ETF is a new addition to a market that had been lacking in good ETF commodity baskets.
The problem with most commodity baskets is that they consist of futures contracts and other derivatives, and have underperformed over time. COMT actually only has 65% of assets in future contracts, including wheat, soybean, silver, sugar, copper, hogs, cattle, coffee, natural gas, crude oil, corn, cotton, cocoa — the most diverse basket I’ve ever seen.
But it balances this with 33% or so in equities that are in the commodities markets — oil companies, miners, and so on. It’s a pretty good idea, and launched at the worst possible time — as commodities are under pressure.
I suspect once commodities stabilize, COMT is going to be a winner.
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 is the Manager of the forthcoming Liberty Portfolio. He can be reached at [email protected].