Don't Ignore Specialty ETFs

11/25/2013


So far this year, a new exchange-traded fund (ETF) has launched an average of once every three days. A lot are gimmicky and highly specialized, tracking obscure indexes or unproven strategies. Many are actually exchange-traded notes (ETNs), debt securities that do not own anything they track and entail unusual risks.

Still, not all specialty funds should be avoided. Some ETFs can help investors diversify a portfolio and make bets on a particular strategy, industry, or asset class. To that end, the table below lists 25 worthwhile niche ETFs. Below we highlight several standouts.

Income picks. Preferred stocks offer high yields, but they behave more like bonds than stocks, with prices sensitive to interest rates and a company's creditworthiness. A solid pick is iShares U.S. Preferred Stock ($38; PFF), which yields 6.5%.

Master limited partnerships (MLPs), which often invest in energy pipelines, do not pay taxes at the corporate level, allowing for outsized dividends. Most MLP funds are structured as ETNs, but one ETF worth a look is ALPS Alerian MLP ($17; AMLP), which yields 5.9%.

Bond picks. PIMCO Total Return ($107; BOND), an actively managed ETF holding mostly government bonds and mortgage securities, is a top pick and a member of our Conservative Portfolio. Yielding 1.6%, the ETF is managed by bond guru Bill Gross and mirrors a top-performing mutual fund he's overseen since 1987.

Investors looking to manage interest-rate risk should consider target-date bond ETFs, which hold bonds with similar maturities and behave more like individual bonds. For example, the Guggenheim BulletShares 2018 Corporate Bond ($21; BSCI) ETF, yielding 2.3%, holds mostly investment-grade bonds that mature in 2018.

High-yield bond funds are the best-performing bond category so far this year. The funds, which hold mostly lower-quality corporate bonds, are generally more sensitive than other bonds to the outlook for the economy. SPDR Barclays Short-Term High Yield Bond ($31; SJNK), which holds bonds with maturities of less than four years, yields an attractive 4.0%.

Stock picks. Many of today's top-performing stocks are the very smallest companies — the kind you find in microcap funds. Microcap ETFs, which typically focus on stocks with market values below $500 million, can be volatile but represent a nice diversifier for most portfolios. Up 35% this year, iShares Micro-Cap ($70; IWC) is worth consideration.

Sector-specific ETFs offer the potential for outsized returns — and risks — because of their narrow focus. Still, if you have strong feelings about a particular sector and understand the risks, sector funds can be a good niche investment. To uncover top picks, we looked for solid track records and reasonable expense ratios. Notable ETFs include SPDR S&P Oil & Gas Exploration & Production ($67; XOP), Guggenheim S&P 500 Technology ($72; RYT), and SPDR S&P Retail ETF ($87; XRT).

International picks. The iShares MSCI EAFE Small-Cap ($50; SCZ) ETF invests in more than 2,100 foreign small-caps — the portfolio has a median market capitalization of $850 million. Top country weights are Japan (27% of assets) and the U.K. (22%). The ETF, with plenty of exposure to industrials (22%) and financials (20%), has rallied 24% so far in 2013.

PowerShares International Corporate Bond ($29; PICB), which holds more than 300 foreign bonds, has a 19% weighting in the U.K. and 16% in France. Up 2% this year and yielding 2.3%, the fund invests mostly in investment-grade corporate bonds and has an average maturity of seven years. The three-year annualized return of 5.4% ranks among the top 1% of its peers.

SPECIALTY EXCHANGE-TRADED FUNDS
Below are 25 specialty exchange-traded funds (ETFs) that should appeal to investors looking to diversify a portfolio. Some are aggressive funds that should make up only a small portion of a portfolio.
-------- Total Return --------
ETF (Price; Ticker)
Est.
Yield
(%)
YTD
(%)
3
Years
(%)
5
Years
(%)
Expense
Ratio
(%)
Assets
($Mil.)
Description
ALPS Alerian MLP ($17; AMLP)
5.9
16.1
9.3
NA
0.85
7,097
25 master limited partnerships
Guggenheim BulletShares 2018
($21; BSCI)
2.3
1.1
NA
NA
0.24
166
High-quality corp. bonds
maturing 2018
Guggenheim S&P 500 Eq. Wht.
Utilities ($65; RYU)
3.6
16.0
13.2
15.4
0.50
51
Nearly 35% invested
in electric utilities
Guggenheim S&P 500 Tech.
($72; RYT)
0.9
31.4
12.8
24.2
0.50
285
About 70 stks. and
25% in semiconduct.
iShares Conservative Allocation
($32; AOK)
2.4
5.8
5.8
7.7
0.30
132
Nearly 70% bonds,
30% U.S & int'l stocks
iShares Growth Allocation ($38; AOR)
2.2
13.5
9.6
12.9
0.31
227
Roughly 60% stocks
and 40% bonds
iShares Micro-Cap ($70; IWC)
1.1
34.7
17.0
22.6
0.72
832
1,300 U.S. microcap stks.,
28% financials
iShares MSCI EAFE Small-Cap
($50; SCZ)
2.0
23.9
10.7
21.0
0.40
2,950
Foreign small-caps,
27% in Japan
iShares MSCI Hong Kong ($21; EWH)
2.6
8.2
5.2
22.3
0.53
2,214
Covers China and Hong Kong
iShares U.S. Preferred Stock
($38; PFF)
6.5
(0.4)
4.7
18.3
0.48
9,020
Roughly 300 stocks,
mostly financials
PIMCO Total Return ($107; BOND)
1.6
(0.4)
NA
NA
0.55
3,728
Actively managed
diversified bonds
PowerShares Emer. Mkts. Debt
($27; PCY)
4.9
(10.2)
4.7
14.8
0.50
1,913
Gov't bonds from 20
emerging markets
PowerShares Int'l Corp. Bond
($29; PICB)
2.3
1.7
5.4
NA
0.50
154
Investment-grade
foreign bonds
PowerShares S&P 500 Low Volatility
($33; SPLV)
2.8
22.0
NA
NA
0.25
3,996
100 S&P stocks
with lowest volatility
PowerShares S&P SmallCap Health
($53; PSCH)
0.3
50.2
28.0
NA
0.29
192
65 small health-care stocks
SPDR S&P Emerging Markets
($65; GMM)
1.8
(1.8)
(1.0)
18.6
0.59
235
China is 23%, with
financials at 25%
SPDR S&P Oil & Gas Explor.
($67; XOP)
0.6
24.8
12.4
20.2
0.35
949
Whiting Petroleum is a
top five holding
SPDR S&P Regional Banking
($38; KRE)
1.4
38.5
20.6
10.7
0.35
2,440
More than 80
mostly small banks
SPDR S&P Retail ETF ($87; XRT)
0.5
39.9
25.1
42.2
0.35
1,009
Nearly 100 consumer
stocks, 28% apparel
SPDR S-T High Yield Bond
($31; SJNK)
4.0
5.6
NA
NA
0.40
2,697
Short-term, high-yield bonds
Vanguard Consumer Staples
($112; VDC)
2.4
26.9
18.0
18.1
0.14
1,844
Household products
about 20% of stocks
Vanguard Industrials ($96; VIS)
1.6
34.2
18.2
22.8
0.14
1,370
345 stocks, General Electric
stake is 12%
Vanguard REIT Index ($67; VNQ)
2.8
4.0
11.8
25.9
0.10
35,005
Real estate investment trusts 
Vanguard Short-Term Corp.
($80; VCSH)
1.4
1.3
3.2
NA
0.12
7,515
High-quality bonds
maturing in 1-3 yrs.
WisdomTree Europe SmallCap
($53; DFE)
3.0
34.5
14.2
23.1
0.58
374
Small-cap dividend stocks,
25% in U.K.

 

RECOMMENDED MUTUAL FUNDS
Through Nov. 19, our Growth Portfolio has gained 24.7% so far this year, versus 24% for its benchmark portfolio. The Conservative Portfolio is up 22.1%, versus 17% for its benchmark.
Portfolio
-- Target Weight --
Total Return & Category Rank *
Fund (Price; Ticker)
Fund Category
Conser-
vative
(%)
Growth
(%)
YTD
(%)
3-Year Ann.
(%)
Exp.
Ratio
Rating
Phone
Number
(800)
Artisan International ($30; ARTIX)
Foreign large-co.
growth
9
9
21.4
A
12.2
A
1.19
98
344-1770
Dreyfus Midcap Index ($37; PESPX)
Midcap blend
0
0
27.8
C
16.1
C
0.50
57
373-9387
Dreyfus Smallcap Stock Index
($29; DISSX)
Small-company
blend
0
0
34.2
B
19.3
A
0.50
90
373-9387
Fidelity High Income ($9; SPHIX)
High-yield bonds
5
4
5.6
C
8.2
C
0.72
56
544-6666
Homestead Small Company Stock
($35; HSCSX)
Small-company
value
5
8
28.8
D
18.7
A
1.03
97
258-3030
PIMCO Total Return ETF
($107; BOND)
Intermediate-term bonds
6
0
(0.4)
A
NA
NA
0.55
NA
400-4383
T. Rowe Price New Horizons
($47; PRNHX)
Small-company
growth
9
9
41.6
A
24.1
A
0.80
98
638-5660
T. Rowe Price Value ($35; TRVLX)
Large-company
value
8
9
32.4
A
18.2
A
0.85
96
638-5660
Thompson Bond ($12; THOPX)
Short-term bonds
6
0
2.6
A
4.9
A
0.78
97
999-0887
Vanguard 500 Index ($165; VFINX)
Large-company
blend
6
7
27.6
C
16.5
B
0.17
73
662-7447
Vanguard Dividend Growth
($21; VDIGX)
Large-company
blend
12
12
28.5
B
17.3
A
0.29
85
662-7447
Vanguard GNMA ($11; VFIIX)
Government bonds
0
0
(1.0)
B
2.7
A
0.21
93
662-7447
Vanguard Growth Index
($46; VIGRX)
Large-company
growth
11
11
25.8
D
16.1
B
0.24
79
662-7447
Vanguard Inter.-Term Tax Exempt
($14; VWITX)
Municipal bonds
0
0
(1.4)
B
4.2
B
0.20
77
662-7447
Vanguard Selected Value
($29; VASVX)
Midcap value
5
7
36.0
A
18.5
A
0.38
100
662-7447
Vanguard Short-Term Invest.-Grade
($11; VFSTX)
Short-term bonds
0
0
1.0
B
2.4
B
0.20
86
662-7447
Vanguard Total Bond Mkt. Index
($11; VBMFX)
Intermediate-term
bonds
0
0
(1.6)
D
3.0
D
0.20
33
662-7447
Vanguard Total Int'l Stock Index
($17; VGTSX)
Foreign large-co.
blend
0
0
13.5
D
5.5
D
0.22
32
662-7447
Vanguard Wellesley Income
($26; VWINX)
Balanced —
60% bonds
0
0
8.1
B
9.7
A
0.25
95
662-7447
Vanguard Wellington
($39; VWELX)
Balanced —
60% stocks
6
9
17.4
A
12.2
A
0.25
92
662-7447
Wasatch International Growth
($29; WAIGX)
Foreign small
company
7
8
24.4
B
14.4
A
1.56
94
551-1700
Wells Fargo Advantage Discovery
($34; STDIX)
Midcap growth
5
7
34.9
A
18.8
A
1.29
94
222-8222
* Ranks and returns through Nov. 19, from Morningstar.   A = top 20% of fund category; B = next 20%; C = middle 20%; D = next 20%; E = bottom 20%.   C Closed.   Area code 888   Fund ratings, which are percentile ranks relative to fund-category peers, are computed monthly using total returns, expense ratios, tax efficiency, and risk-adjusted performance.

 

 


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