3 Niche ETFs That Will Keep Flying - ETF News And Commentary
January 24 2014 - 11:53AM
Zacks
The ETF industry
continues to grow in size and importance. 2013 was another
spectacular year for the industry with inflows exceeding $190
billion. 159 new products were launched last year, taking the total
number of products to 1551, while assets under management have
surged to $1.71 trillion. (Read: 3 Hot Sector ETFs for 2014)
While large, plain-vanilla market cap weighted ETFs tracking the
broader market or popular segments continue to be very popular with
investors, there are some smaller but excellent ETFs that focus on
certain 'niche' corners of the market. These ETFs provide access to
some specialized strategies that are otherwise unavailable to
retail investors.
Below we highlight three ‘niche’ ETFs that had a strong performance
last year and look poised to outperform this year as well.
Invest Like Hedge Fund Titans with Guru
Holdings Index ETF
The hedge fund industry with about $2.4 trillion in assets is
accessible only to very wealthy investors as these funds generally
require minimum investments of $250,000 and also have limits on
cash withdrawals.
Further, hedge fund investing is expensive as they usually charge
an annual asset management fee of 2% and a performance fee of 20%
of fund’s profits (2 and 2 fees). Also, their performance may not
justify the steep fees that they charge. (Read: 3 Niche ETFs
Crushing the Market)
In 2013--a spectacular year for US stocks, most hedge funds
delivered lackluster returns but some emerged as big winners.
Most investors would like to invest like George Soros, Carl Icahn
and John Paulson and there are some ETFs that provide access to
investing secrets of these stalwarts, without charging the hefty
fees that their funds charge.
Global X Top Guru Holdings Index ETF (GURU) uses a
proprietary methodology to compile the best ideas from a select
pool of hedge funds where the 13F information is most valuable.
They exclude hedge funds with high turnover. The fund aims to
generate alpha vs. benchmark equity indexes and rebalances
quarterly
The product was launched in June 2012 and has attracted $541.9
million in assets so far. It charges 75 basis points in
expenses per year. (See: 3 ETFs to Watch for Big Moves this
year)
GURU has returned 81.0% from inception through the end of
2013, compared with 49.7% for SPY.
Profit from Private Equity Market’s Strong Momentum and
Enjoy a Double-digit Yield
Private equity firms had a blockbuster year in 2013.
According to WSJ, investors in private-equity funds are expected to
receive more than $120 billion for 2013, up from last year's record
of $115 billion. Strong sentiment resulted in record fund flow with
firms raising buyout funds totaling $143.5 billion last year, the
highest level since 2008.
If the stock market continues its uptrend and interest rates do not
rise sharply, then the private equity market can maintain its
positive momentum. Per CNBC, Tiger 21—a group of super-rich
individuals (median net worth $75 million) sees private equity as
the best opportunity in 2014. (Read: Beat the cold weather with
these hot sector ETFs)
Another positive factor here is the Volcker rule, which seeks to
bar deposit taking institutors from proprietary trading and thus
private equity firms could gain market share in the proprietary
trading space. Private equity also has a low correlation to the
broader market and provides portfolio diversification.
While many investors are unfamiliar with this corner of the
financial market, it is definitely worth a look due to its superior
performance, positive outlook and low correlation with the stock
market. (See: 5 ETF Predictions for 2014)
Private equity space is generally accessible only to super-rich and
institutional investors but retail investors can access this space
via an ETF.
PowerShares Global Listed Private
Equity ETF (PSP)
tracks the Red Rocks Global Listed Private Equity Index. The index
is comprised of securities, ADRs and GDRs of 40 to 75 private
equity companies.
Currently the fund has 64 holdings with U.S. PE firms accounting
for 42% of holdings, followed by UK and France at 18% and 8%
respectively.
Expense ratio of 2.19% is certainly high but the product sports an
excellent yield of 13.5% currently. The ETF returned 37.1% in
2013.
Investors should however remember that private equity is a risky
asset class and during a period of market turmoil or prolonged
economic downturn this ETF may perform worse than the broader
market.
During the financial crisis, private equity space and this product
had a terrible performance. So, this investment will need to be
monitored carefully.
Benefit from Insider Buying Trends with Insider Sentiment
ETF
Academic studies have shown that insider stock transaction data can
provide signals for the future direction of stocks in question
since insiders know their company best and where the share price
may be headed. In particular, purchase of shares by insiders is
usually a strong indicator of bullish trend.
Further companies with positive earnings estimates revisions are
more likely to outperform the broader market in the near
future.
Guggenheim Insider Sentiment ETF (NFO) is based on
the Sabrient Insider Sentiment Index, which selects securities on
the basis of favorable corporate insider buying as well as earnings
estimate increases by analysts. Insider buying trends are
determined from the public filings of such corporate insiders.
The fund holds about 100 securities in almost equal weights.
Looking at the sector exposure, Financials (21%), Consumer
Discretionary (18%) and Industrials (17%) occupy the top three
spots.
The fund made its debut in September 2006 and has delivered 10.50%
average annual return since inception compared with 6.95% return by
the S&P 500 during index during the same period. In 2013, NFO
returned 36.13%.
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GLBL-X GURU IDX (GURU): ETF Research Reports
GUGG-INSDR SENT (NFO): ETF Research Reports
PWRSH-GLBL LIST (PSP): ETF Research Reports
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