ETFs for the Road Less Traveled

A good portion of the exchange-traded-fund community has been abuzz recently with talk of the newest new things: namely, ETFs focused on gold, China, and dividend-paying stocks. Some of those new funds have attracted a lot of assets in a short period of time, but it remains to be seen if they can live up to the attention they have attracted.

Often, the latest bandwagon offers a quick trip to disappointment (think Internet funds in 2000). That is not to say the latest new funds are due for a fall, but to point out that there may be as good or better options in areas that aren't as popular. Granted, there are fewer contrarian opportunities now than there were in the late 1990s, when a huge disparity developed between so-called "old economy" and "new economy" stocks. Still, across-the-grain investors can find some ideas, and ETFs to put them to use, if they look closely. The following notions are not sure things and should be employed within the context of a diversified, long-term portfolio, but they are worth exploring.

Vanguard Growth VIPERs  (VUG)
The large-growth category has eaten the dust of the average value fund on an annualized basis over the past five years. Such divergences don't last forever, a fact that has not been lost on many veteran fund managers. The team that runs  Dodge & Cox Stock (DODGX), for example, added large-growth stocks to their portfolio earlier this year. No one can predict for sure when the growth/value gap will close, but ETF investors can use this fund to take advantage of the eventual reversion. There are older, large-growth ETFs, but none cheaper than this one, which has a 0.15% expense ratio. The fund's bogy, the MSCI U.S. Prime Market Growth Index, also may do a better job capturing the return of the large-growth universe and reducing turnover than other indexes. That's because it uses a quantitative, multifactor construction methodology and allows some overlap between market-cap and style boundaries.

 IShares S&P Global 100 (IOO)
A market rotation from small-cap to large-cap stocks also could help big multinational companies. This fund offers cheap, pure exposure to global large caps. It tracks Standard & Poor's index of the biggest, most liquid companies on Earth. The ETF charges just 0.4% and keeps about 90% of its money in global market leaders, such as  General Electric (GE),  BP (BP) and  HSBC Holdings (HBC). The portfolio also sported lower-than-average valuations, such as price/earnings and price/cash, than the overall stock market (as defined by the Wilshire 5000) did at the end of November.

Vanguard HealthCare VIPERs (VHT)
Investors certainly have been pessimistic about the pharmaceutical business this year. Besides the long-standing worries about expiring product patents, generic competition, tighter regulation, and hard bargaining from managed-care organizations, drug companies had to contend with withdrawal of  Merck's (MRK) Vioxx pain drug from the market and doubts about the safety of other treatments. For those willing to bet that the future is not quite as bleak as it seems for drugmakers, this fund offers a cheap and concentrated dose of the stocks. The ETF, which tracks MSCI's health-care index, charges a 0.28% expense ratio and keeps more than half of its money in its top 10 holdings, seven of which are drugmakers. The Health Care Select SPDR (XLV) has the same expense ratio and has been around longer, but Vanguard's offering is a bit more diversified because it owns more stocks. If you're not wedded to indexing, though, the actively managed  Vanguard Health Care (VGHCX) might be a better deal: It charges the same expense ratio and can be bought without a commission.

Stat Du Jour
Barclays Global Investors recently said its U.S.-based iShares family of ETFs reached $107 billion in assets at the end of November 2004. It took iShares, which  Barclays (BCS) launched in May 2000, about four and a half years to break the $100 billion mark. That's lightning quick, and a sign of how fast ETFs have grown in recent years, as well as how Barclays has dominated the industry.

IShares can't declare total victory over traditional funds yet, though. The assets of just two top-10 fund families grew more than iShares' in absolute terms over roughly the same time period, but those families each more than doubled the growth of Barclays' U.S.-based ETFs. Vanguard's mutual fund assets grew by nearly $235 billion from May 2000 through November, while American Funds' mutual fund assets grew by $252 billion from May 2000 through October.

Meanwhile, net inflows into iShares from May 2000 through the end of November 2004 amounted to $92 billion, according to Barclays. The Investment Company Institute reported net equity and fixed-income mutual fund inflows of $661.6 billion from May 2000 through October 2004.

Disclosure: Barclays Global Investors (BGI), which is owned by Barclays, currently licenses Morningstar's 16 style-based indexes for use in BGI's iShares exchange-traded funds. iShares are not sponsored, issued, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in iShares.