Tread Carefully With Niche ETFs

1/21/2013


Twenty years ago this month, the first exchange-traded fund, SPDR S&P 500 ($147; SPY), was introduced. Now more than 1,200 ETFs slice the securities markets a seemingly endless number of ways. Increasingly, ETFs target obscure corners of the markets, touting strategies once unavailable to most investors.

The appeal of niche ETFs is obvious; they allow investors to bet on a narrow segment and potentially earn an outsized payoff. But the funds can be especially volatile, making them suitable only for risk-tolerant investors. If you decide to test the water, adding one or two in small doses (less than 5% of assets) to a well-rounded portfolio could improve diversification and potentially juice performance. When investing in specialty ETFs, keep the following in mind:

• Some follow strategies only appropriate for savvy investors.

• Many have limited track records, making them difficult to evaluate based on past performance. 

• Expense ratios can be considerably higher than traditional, broader index ETFs.

• In some ETFs' concentrated portfolios, performance hinges on only a handful of securities.

• Many invest in thinly traded securities, which can impact trading liquidity and pricing.

SPECIALTY ETFs
-- Total Return --
ETF (Price; Ticker)
12
Mos.
(%)
3 Yrs.
(Ann.)
(%)
Exp.
Ratio
(%)
Description
iShares Gold ($16; IAU)
2.2
13.7
0.25
Gold bullion
iShares KLD 400 Social ($54; DSI)
14.3
9.0
0.50
Socially responsible cos.
iShares Nasdaq Biotech.
($145; IBB)
30.6
20.6
0.48
Over 100 biotech names
PowerShares DB Commodity
($28; DBC)
1.3
4.3
0.85
Divers. futures contracts
PowerShares Dynamic Building
($18; PKB)
42.2
16.5
0.63
Construct./infrastructure
PowerShares S&P 500 Low Vol.
($28; SPLV)
13.9
NA
0.25
Low-volatility stocks
ProShares Ultra S&P 500
($64; SSO)
32.0
18.2
0.91
Returns twice the S&P 500
SPDR S&P Oil & Gas Exploration
($56; XOP)
8.6
10.5
0.35
Over 70 U.S. energy stocks
SPDR S&P Regional Banking
($29; KRE)
13.6
9.2
0.35
Thrifts & banks
United States Oil ($34; USO)
(10.9)
(4.0)
0.65
Tracks W. Texas crude oil

For investors with particularly strong feelings about a theme or niche, the table above lists 10 funds worth watching. Below we review three interesting opportunities.

iShares Gold ($16; IAU) holds more than 240 tons of vaulted gold bullion. In contrast, some gold funds invest in futures contracts. Gold is considered a good hedge against inflation. The fund, with a modest 0.25% expense ratio, has a three-year annualized return of 13.7%.


PowerShares S&P 500 Low Volatility ($28; SPLV) invests in the 100 least-volatile stocks in the S&P 500 Index. The fund is heavily weighted in consumer staples (27% of stocks) and utilities (31%). Low-volatility funds tend to underperform in strong markets. In 2012 the fund returned 10.1%, versus 16.0% for the S&P 500.


SPDR S&P Regional Banking ($29; KRE) focuses on thrifts and regional banks, including Forecasts recommendation Fifth Third Bancorp ($16; FITB). The sector is benefiting from solid loan growth and gains in mortgage banking. The fund, yielding 2%, returned 16.9% last year.

OUR RECOMMENDED MUTUAL FUNDS
Through Jan. 15, our Growth Portfolio has gained 2.8% so far this year, versus 3.0% for its benchmark portfolio. The Conservative Portfolio is up 2.5%, versus 2.1% for its benchmark. In 2012, the Growth Portfolio rose 15.3%, while the Conservative Portfolio gained 14.1%.
-- Year-To-Date --
--- % Of Portfolio ---
 
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating
Dreyfus Midcap Index ($30; PESPX)
4.3
C
0
0
81
Dreyfus Small Cap Stock Index
($23; DISSX)
3.6
D
0
0
84
Fidelity High Income ($9; SPHIX)
1.1
D
5
5
71
Homestead Small Company
($28; HSCSX)
2.7
E
7
8
100
Manning & Napier International
($9; EXITX)
1.6
E
7
7
59
T. Rowe Price New Horizons
($35; PRNHX)
4.5
B
10
10
98
Vanguard 500 Index ($136; VFINX)
3.3
C
6
7
80
Vanguard Dividend Growth
($17; VDIGX)
3.6
B
12
12
91
Vanguard Emerg. Mkts. Stock Indx.
($28; VEIEX)
1.3
C
0
4
59
Vanguard GNMA ($11; VFIIX)
(0.2)
C
5
4
86
Vanguard Growth Index
($38; VIGRX)
3.0
D
12
12
93
Vanguard Inter.-Term Tax-Exempt
($14; VWITX)
0.6
C
0
0
67
Vanguard Selected Value ($22; VASVX)
3.8
C
5
6
76
Vanguard Short-Term Invest.-Grade
($11; VFSTX)
0.2
B
0
0
91
Vanguard Total Bond Mkt. Index
($11; VBMFX)
(0.2)
E
9
0
33
Vanguard Total Int'l Stock Index
($15; VGTSX)
2.3
B
5
4
67
Vanguard Wellesley Income
($24; VWINX)
1.2
C
0
0
98
Vanguard Wellington ($35; VWELX)
2.7
A
6
9
91
Wasatch International Growth
($24; WAIGX)
1.3
D
5
5
95
Wells Fargo Advantage Discovery
($25; STDIX)
4.0
B
6
7
88
* Year-to-date ranks through Jan. 15 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%;
E = bottom 20%. Fund ratings are percentile ranks based on our fund-rating system.

Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com