These five funds have yet to attract much in the way of investor interest, but they're all worth a look.
Several weeks ago, we laid out our five favorite exchange-traded funds that had launched in the previous year.
But what about other ETFs that have launched in the past year with similarly sound strategies and unique exposures, but that--for one reason or another--haven't yet resonated with investors and advisors?
We think it's worthwhile to highlight an additional five "unloved" ETFs that have debuted in the past year--ones that for whatever reason have not yet caught on with investors. Not surprisingly, some of these ETFs also cover areas where much in the way of ETF investor dollars has been directed in recent months--corners such as lower-volatility stocks, dividends (and other forms of high payouts), high-yield debt, and emerging-markets debt.
Like our five favorite ETFs, we believe that these five "unloved" funds also represent strong innovation and the correct use of the ETF vehicle.
As before, a word of caution: By definition, these five ETFs are small, with limited levels of assets and thin volumes. As a result, investors should remember to use limit orders, particularly for large trades or in volatile markets, and should watch bid-ask spreads closely. What's more, these ETFs also do not cover all asset classes or strategies out there. So as always, investors should use these ETFs in conjunction with other arrows in their quiver--whether other ETFs, mutual funds, closed-end funds, or individual stocks--to gain the exposure they are seeking. And in some cases, the funds below are best used as specialty satellite holdings, or in a tactical manner, as part of a diversified portfolio.
Here are our five favorite unloved ETFs that have started trading in the past year:
PowerShares Fundamental Investment Grade Corporate Bond Portfolio PFIG holds a portfolio of corporate bonds rated investment-grade or higher by both Moody's and Standard & Poor's. The ETF tracks a fundamental index created by Research Affiliates, also known as RAFI. The index's methodology ranks each index component by taking four fundamental corporate accounting variables and then calculating a composite weighting for each security by comparing those variables against those of other issuers. So why should investors consider a fundamental investment-grade corporate-bond ETF? The reason is that the RAFI methodology enables the fund to select the very best, investment-grade corporate bonds, resulting in a very high-quality portfolio. And the RAFI methodology has been shown to be very successful with investors, as evidenced in the high-yield space, where the similarly constructed (but obviously differently positioned) PowerShares Fundamental High Yield Corporate Bond Portfolio PHB, which holds high-yield bonds, has just more than $1 billion in assets. In addition, PFIG has the added benefit of having a very attractive, 0.22% expense ratio. Despite the historic performance success that RAFI methodologies have had, PFIG still has a paltry $20 million in assets.
PowerShares S&P International Developed Low Volatility Portfolio IDLV is part of a suite of low-volatility ETFs issued by PowerShares. Research has shown that on a risk-adjusted basis, the least-volatile stocks have outperformed both in U.S. equity markets and in most international stock markets as well. IDLV follows the same methodology as PowerShares' wildly popular PowerShares S&P 500 Low Volatility Portfolio SPLV, which is in the same suite of funds as IDLV and carries the same rock-bottom 0.25% expense ratio. However, IDLV, which holds the 200 least volatile stocks in an index of companies from developed-markets countries other than the U.S., has struggled to attract assets, with just $11 million in investment as of this writing. Interestingly, investors' avoidance of this ETF has little to do with recent problems in Europe. Why? The answer is that this ETF makes sizable sector and country bets and currently has a very heavy tilt toward companies based in Australasia. Fully 43% of all assets are invested in Japanese firms, and more than 70% of assets are invested in companies from Australasia.