Loading...
Symbols:
Authors:

Five Good ETF Ideas That Have Yet to Catch On

by: Index Universe August 28, 2008 | about stocks: GRN / HAO / HHK / MES / NXT / PMNA / QQQQ / USL / USO    
Index Universe

Index Universe

From Index Universe:
Inside ETFs
JOI
Free subscription for US Financial Professionals ETFR
Subscribe now: $279/year
Become a Contributor Submit an Article
  • Font Size:
  • Print

By Matthew Hougan

We all love to make fun of the zany ETFs that come to market and never attract any assets.

You know, like the HealthShares Ophthamology ETF (AMEX: HHZ). The idea that $200 million in assets would flow into Ophthamology companies was prima facie absurd, something the fund's developer---XShares---has now recognized, as the fund is being liquidated on September 19th.

But for every Ophthamology ETF, there is an ETF backed by a good idea that never catches on. I might count the HealthShares Cancer ETF (AMEX: HHK) among them. Cancer is a legitimate sub-class of the healthcare industry; an area where tons of new money and legitimate scientific breakthroughs are changing the way we treat a disease. I'm not making allocations to cancer in my portfolio, but I wouldn't fault somebody who did.

With that in mind, I thought I'd look at the list of ETFs with very little assets to see what gems lie beneath the rubble. To make it fun, I thought I'd highlight only funds with less than $10 million in assets as of July 31, 2008. In some cases, the funds have just launched and haven't had enough time to attract assets; in other cases, they've languished on the market for years.

This is not a recommendation to buy any of these funds, which have some flaws and don't belong in every portfolio. But it is a reminder that there are some interesting funds out there that people pass up.

Good Funds With Less Than $10 Million In Assets

1) United States 12 Month Oil (AMEX: USL):

People love to invest in oil using ETFs. The United States Oil Fund (AMEX: USO) has over $1 billion in assets, and has become the retail trading vehicle for crude.

The United States 12 Month Oil Fund, however, has attracted just $7 million since launching late last year. That's odd, as you could argue that USL is a better proxy for the oil market than USO.

The difference is this: USO follows the "classic" method of investing in the oil space. It buys the near-month crude oil futures contract and then rolls that position over month-to-month. For example, right now, USO holds oil contracts expiring in October; before those contracts expire, it will buy oil contracts expiring in November. And so on and so on.

By contrast, USO spreads its oil contracts out over 12 months: It owns a few October contracts, a few November contracts, a few December contracts, etc., right up through September of next year.

Why should you care? Because often, there's a big gap between the near-month oil contract and the second-month oil contract. This can either boost returns, if the near-month price is lower than the second-month (a situation called backwardation), or cut into returns if the near-month price is higher (a situation called contango). The impact can be large: In 2006, oil investors regularly lost 2-3% of their returns each month because the market was in contango.

In theory, USL should stick closer to the spot price of oil than USO over time over time.

So why hasn't it caught on? For one, it's complicated to understand the differences, and with USO coming first to market, it had a huge advantage. Moreover, right now the market is in backwardation, which means that USO should outperform USL in the short-term. But things have been moving around quickly in the oil space, and just a few months ago, the opposite was true. I think over time investors may come to see the wisdom of moving back and forth between USL and USO depending on the status of the oil markets.

2) iPath Global Carbon ETN (NYSE: GRN)

The iPath Global Carbon Credit ETN (NYSE: GRN) is the only product I know of that lets you easily invest in the value of carbon credits. The fund has performed terribly since it launched, falling 26% in July, which probably explains the low asset counts. But the idea of tapping into this fast-growing market still strikes me as appealing.

The problem, I suppose, is that few people know how or where GRN would fit into a portfolio. Roger Nusbaum of TheStreet.com has expressed surprise that the historical correlation between carbon credits and stocks is high, but that makes perfect sense to me: the value of carbon credits will increase as industrial production increases, and decline as industrial production declines, just like stocks.

Given its dismal performance since launching in early July, I'm not really surprised GRN has no assets. But I suspect that, over time, as investors come to understand this market, funds and notes like GRN will find a home.

3) Market Vectors - Gulf States (NYSE: MES)

We've seen two ETFs launch in the past year focused on the Middle East & Africa: the PowerShares MENA ETF (NASDAQ: PMNA) and the Market Vectors Gulf States Index (NYSE: MES). Both launched in July 2008, so they haven't had much time to gather assets: As of 8/27, PNMA had $31 million and MES had just $4 million.

I chose to focus on MES because of its smaller asset count and also because of its pure-play focus on the Middle East. At a time when the correlation between U.S. and international stocks is narrowing quickly, the Middle East offers a solid opportunity for diversification. If you think high oil prices are hurting the global economy, for instance, you've got to imagine that they're helping the Middle East.

Don't just take my word for it, either: for the year ending July 31, 2008, the index for MES was up 21.8%, while the S&P 500 was down 11.1%. Now that's diversification.

4) Claymore/Alpha China SmallCap (AMEX: HAO)

Speaking of diversification, is anyone else surprised that the Claymore/AlphaShares China Small Cap Index ETF (AMEX: HAO) has attracted so few assets? As of July 31, it had just $9.8 million in assets according to Morningstar, although that's since jumped to $21 million as of August 27 (perhaps a post-Olympics boom?).

The case for this ETF seems clear. China is growing fast. The big, state-owned companies like PetroChina and the Bank of China are pseudo-government entities that don't reflect the innovation in that society. If you really believe in a rising China with a rising, creative Middle Class, you've got to believe in the entrepreneurial power of the Chinese citizens. Investing in small-caps gives you access to this power, and HAO is the only way to do it.

I know, I know --- the fund has gone nowhere but down since launching in late-2007, and is off more than 25% this year. But still, it strikes me as an interesting idea.

5) NYSE ArcaTech 100 (NYSE: NXT)

This is one of my favorite stories because it shows just how odd the market can be. The Nasdaq-100 is a very odd index. It holds only stocks listed on the Nasdaq; it has a top-heavy weighting system that, right now, puts a 13.5% allocation Apple; and it's widely regarded as a "tech" index despite the fact that only 65% of the index is invested in Technology.

The NYSE ArcaTech 100, by contrast, makes a great deal more sense while being structured in a similar way to the Nasdaq-100. The NYSE ArcaTech 100 tracks companies listed on all three U.S. exchanges, rather than artificially restricting itself to one; it puts a 5% maximum cap on weighting any component, to keep from being top-heavy (although it unfortunately uses a price-weighting mechanism, as opposed to a market-cap-weighting approach); and it is, as the name suggests, it is an index of 100 leading technology companies, with none of the Financial or other exposure that clogs up the Nasdaq-100.

And yet, NXT has $7 million in assets and PowerShares Nasdaq-100 ETF (NASDAQ: QQQQ) ETF has $17 billion. Go figure.

Related Articles

This article has 5 comments:

  •  
    Aug 28 09:27 AM
    HAO and GXC both look like good diversified China ETFs and both have gotten bloodied and neither have much in the way of assets which is too bad.
    Reply
  •  
    Aug 28 09:57 AM
    Good article. One clarification is required however.

    You state:

    "USO follows the "classic" method.. then rolls that position over month-to-month

    By contrast, USO spreads its oil contracts out over 12 months.."

    One has to be USL, which is it?
    Reply
  •  
    Aug 28 12:27 PM
    Good article, but for the typo noted by Jimstam, and one omission: there are not two, but _three_ new ETFs focusing on the Middle East; the third being Wisdom Tree's GULF. And a couple of others just for Africa.
    Reply
  •  
    Aug 29 01:11 AM
    Then there are the ETFs no one has yet thought to offer. For example, a cash ETF that is designed to function as an effective low-risk, interest-bearing store of value for any investor anywhere in the world at any time. Such an ETF might consist of 25% gold and 15% silver, with the balance in perhaps 8-10 (probably sovereign) issuers' 3-month top-rated paper denominated in a variety of currencies. Reasonable requirements would be that the issuer is investment-grade and has the best credit rating of any issuer offering paper in a given currency, and that the currency itself has ample global liquidity. Using such a fund to store one's uninvested cash would be quite attractive for the global investor; it is unlikely to change much in absolute value, will have much lower volatility than any one currency or metal, and will generate a respectable yield (unlike certain currencies I could name). Where is this ETF? Sadly, it doesn't exist, so anyone with less than a few million in cash will have a hard time getting these benefits.
    Reply
  •  
    Aug 29 08:15 AM
    The Nasdaq-100 is not an "odd" index. It's comprised of the 100 largest Nasdaq-listed companies. The ArcaTech 100 is not comparable. It's sector-specific and QQQQ is exchange-specific. Your criticism is equivalent to faulting DIA for holding only the Dow 30 and then suggesting that IYW is a better pick.
    Reply
More Comments on USL »
More by Index Universe

Investment Resources
Money Management 

Research 

Seeking Alpha provides these ads as a service to its leading contributors
Articles on related themes
Commodity ETFs 

Asset Allocation with ETFs 

Closed-End Funds 

Currency ETFs