Just as there are various “celebrity stock tickers” that every investor recognizes instantly (GOOG, MSFT, F, JNJ), there are some ETFs that everyone knows. Generally, these ETFs, such as SPY, GLD, and QQQQ, reflect the most widely-known investment strategies and asset classes. And while the 25 largest funds that account for more than half of total ETF assets, there is a lot more to the ETF universe than these mega funds. With nearly 900 exchange-traded products available today, there are several funds flying under the investment radar that present compelling investment cases and have delivered strong historical returns. The following ten ETFs are our picks for funds that haven’t received nearly the attention they deserve from investors (for more actionable ETF plays, sign up for our free ETF newsletter).
In addition to a unique investment thesis, each of these funds meets the following criteria:
- Less than $150 million in AUM
- Year-to-date returns of at least 20% (annualized for ETFs introduced this year)
- Expense ratio below 1%
These ETFs run the gamut the investable universe – spread across asset classes, investment strategies, and risk profiles. The funds making up our list of top ten “hidden gem” ETFs range from quasi-actively-managed funds to commodities to fundamentally-weighted products.
Claymore/Sabrient Insider ETF (NFO)
When selecting individual stocks, many sophisticated investors thoroughly analyze insider buying patterns to get a perspective on management’s view for the long-term prospects of a company. NFO does just that, analyzing hundreds of potential holdings to select equities with positive insider buying trends. The index underlying this ETF contains the 100 stocks with the highest levels of insider sentiment, as determined by Sabrient. The levels of insider sentiment are primarily based on four factors: the number of insiders that have bought stock, the percent increase in insider holdings, number of positive analyst revisions and the percent increase in analyst expectations (see fundamentals of NFO here).
The index also gives extra weight to transactions that involve open market purchases as opposed to purchases that are a part of compensation. Since the beginning of the decade, this index has crushed the Russell 3000, outperforming it by over 8% per year (PDF). As legendary investor Peter Lynch once said, “Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise”.
ProShares Credit Suisse 130/30 (CSM)
CSM is the first fund in the Alpha ProShares line of funds that seeks to generate excess returns over a widely-followed benchmark. This ETF employs a strategy popular among hedge funds and other large, sophisticated investors: taking a 100% long position in a benchmark, selling 30% of the portfolio short, and using those short sale proceeds to establish more long positions (resulting in net long exposure of 100%).
The 130/30 strategy has been around for years, but CSM is the first to package it in the ETF structure (for a more thorough explanation of these funds, read our definitive guide to 130/30 ETFs). While the fund’s holdings could change at any time, technology is currently the largest sector of its long portfolio and financial stocks are the biggest component of its short position.
CSM’s “universe” of eligible stocks is the S&P 500, meaning that this ETF will have risk and return characteristics similar to this benchmark, but the potential for outperformance. The fund is up nearly 22% since its inception in the summer, outperforming the S&P 500 by about 100 basis points over that period (see more information on CSM’s fact sheet).
EG Shares Emerging Markets Metals & Mining Titans Index Fund (EMT)
There are a number of emerging markets ETFs available to U.S. investors, but the vast majority of them invest across all sectors of the economy, making it difficult to target certain industries. But as these developing countries have expanded to account for a larger portion of the global economy, investors have been anxious for ways to gain targeted sector exposure in foreign markets. Emerging Global Advisors has launched a platform consisting of four such ETFs, but we particularly like the investment thesis behind EMT.
Investors like emerging markets in part because they offer leveraged exposure on mining and energy industries. EMT takes this one step further, investing in large, liquid mining companies engaged in industrial and precious metals exploration, extraction, and production. EMT is heavy in the resource-rich countries of South Africa, Brazil, China, and Russia. Launched in May of this year, EMT has delivered returns of almost 45% since its inception (see more charts of EMT here).
ETF Securities Physical Gold Shares (SGOL)
Introduced earlier this year, SGOL has already become very popular among investors looking for exposure to gold. While there are various funds that track the price of gold bullion, SGOL distinguishes itself in a few ways.
Unlike other gold ETFs, SGOL stores its gold bars in a secure vault in Switzerland that is approved by the London Bullion Market Association’s “good delivery” standards. For gold bugs with big holdings in the yellow metal, this geographic diversification (as well as custodian diversification) allows them to breathe a little easier. SGOL provides these benefits while charging one of the lowest expense ratios in the Precious Metals ETFdb Category at just 0.39%.
For investors who are bullish on gold but do not want to deal with the hassle and worry of storing the precious metal, this ETF is an excellent choice, especially for those who are not sold on the derivatives-based choices in the marketplace today or worry about a repeat gold confiscation in the U.S. To read more about SGOL, see this Guide to Gold ETFs.
Direxion Daily Mid Cap Bull 3x Shares (MWJ)
Despite the debate raging around the appropriate uses of leveraged ETFs, these funds remain tremendously popular among sophisticated investors looking to profit from a short-term swings in asset prices. MWJ seeks daily returns equal to 300% of the daily return on the Russell Midcap Index, a benchmark that consists of the 800 of the smallest securities in the Russell 1000 and has an average market capitalization of $5.5 billion.
MWJ has gained almost 75% on the year, putting it well ahead of comparable funds offering exposure to large cap equities (BGU, up 53%) and small cap equities (TNA, up 41%). But many investors overlook mid cap investments in favor of a “barbell” strategy focusing on large cap and small cap equities. But as MWJ’s performance shows, mid caps can offer unique and appealing risk characteristics not available elsewhere (see technical analysis of MWJ here).
As with all triple leveraged funds, MWJ comes with extreme risk and is not for all investors. But for those with the ability and willingness to tolerate risk, it is a forgotten option that may be a superior way to capitalize on short term movements in the equity markets (see a complete guide to leveraged ETFs to learn more).
SPDR S&P Emerging Markets Small Cap ETF (EWX)
While there are a number of funds that invest in emerging market countries, most are dominated by holdings in large and mega cap global companies. EWX focuses exclusively on small cap companies (it has an average market cap just over $1 billion) from a wide range of countries in a variety of sectors. This fund is heavy in the BRIC countries, and also has significant weightings in Taiwan, South Africa, and Southeast Asia, providing excellent geographic diversification.
Many investors believe that small caps outperform large and mid cap companies over time. When coupled with the high growth prospects in many emerging markets, EWX provides opportunity for tremendous growth (along, of course, with considerable risk). In 2009, EWX has outperformed many of the most popular emerging markets ETFs by a wide margin.
|EEM||iShares MSCI Emerging Markets Index Fund||63.2%|
|VWO||Vanguard Emerging Markets ETF||72.2%|
|EWX||SPDR S&P Emerging Markets Small Cap ETF||85.7%|
|*As of October 16, 2009|
RVE Hard Assets Producers ETF (HAP)
Based on a index created by legendary investor Jim Rogers, this fund from Van Eck seeks to expose investors to a diversified mix of companies that produce a wide variety of commodities. Rogers has recently warned of a coming inflation Holocaust, and in his view commodities stocks are one of the best forms of protection against this onslaught.
HAP focuses on energy (40% of holdings) and agricultural (30%) companies, with its top two holdings in Monsanto and Exxon Mobil (see more holdings of HAP here). The fund even includes water producers and alternative energy stocks, a first for commodity equity indexes. The fund maintains a low P/E of under 11, and is consistent with the Jim Rogers philosophy of diversifying exposure beyond the U.S. Close to 57% of the fund’s holdings are outside the U.S. HAP has surged almost 30% this year as rebounds in commodity prices and equity markets have lifted stocks of commodity producers.
PowerShares Dynamic Energy Portfolio (PXI)
Given their potential for rapid appreciation during periods of rising oil prices, energy ETFs have a place in almost every portfolio. But many ETF investors who are bullish on the energy industry choose to gain this exposure through traditional market capitalization-weighted funds. PXI holds many of the same stocks that make up XLE and VDE, but offers potential for outperformance by employing a quasi-active management strategy to pick stocks and determine weightings.
PXI is one of PowerShares’ line of “dynamic” ETFs that track Intellidex indexes. Instead of determining holdings based simply on market capitalization, Intellidex benchmarks employ a proprietary screening process to select stocks likely to outperform broad market barometers. Metrics considered in selecting the components of PXI include fundamental growth, stock valuation, investment timeliness, and risk factors.
Stock screening methodologies certainly don’t guarantee excess returns. But several PowerShares ETFs have a history of outperforming market capitalization-weighted benchmarks. In 2009, PXI has been one of the best performers among energy ETFs, gaining nearly 40% and outpacing more popular funds by more than 10%.
|PXI||PowerShares Dynamic Energy Portfolio||40.0%|
|VDE||Vanguard Energy ETF||29.5%|
|IYE||iShares Dow Jones U.S. Energy Index Fund||22.4%|
|XLE||Select Sector Energy SPDR||23.5%|
|*As of October 16, 2009|
iShares Dow Jones International Select Dividend Index Fund (IDV)
IDV tracks the Dow Jones EPAC Select Dividend Index, a benchmark composed of companies that have consistently provided high dividend yields. IDV offers exposure to more than 15 developed economies around the world, including Australia (30%), the UK (13%), and Finland (9%). IDV has a very attractive distribution yield above 3%, and is one of the cheapest options for investors looking to gain diversified exposure to developed markets, with an expense ratio of 0.50%.
Many investors have historically split their equity exposure primarily between U.S. stocks and emerging markets. But following the recent economic downturn, the idea of a “new normal” in U.S. equity markets has investors considering diversifying their equity exposure into foreign markets without taking on the risk profile of emerging markets. With its focus on dividend-paying companies in developed markets, IDV provides an efficient way to spread a portfolio around the globe.
The difference in year-to-date returns between IDV and its U.S. counterpart are rather astounding. IDV has gained more than 60%, while the iShares Dow Jones Select Dividend Index Fund (DVY), which invests exclusively in dividend-paying U.S. equities, has returned about 3% (see technical analysis of IDV here).
|DVY||iShares Dow Jones Select Dividend Index Fund||3.0%|
|IDV||iShares Dow Jones International Select Dividend Index Fund||60.9%|
WisdomTree Small Cap Earnings Fund (EES)
Exposure to small-cap equities is a critical component of most well-rounded portfolios. Small companies have historically provided opportunities for enhanced returns (albeit with increased risk and volatility). But most investors gain exposure to small cap stocks by tracking market capitalization weighted indexes such as the Russell 2000 or S&P SmallCap 600.
EES takes a different approach, weighting its holdings based on the cumulative earnings generated in the prior four fiscal quarters. By weighting components based on earnings and not market capitalization, WisdomTree seeks to avoid overweighting overvalued stocks and underweighting undervalued stocks (PDF). This ETF is still very well diversified – it has more than 800 holdings and no single sector accounts for more than 20% of assets – and its performance relative to other small cap ETFs is rather impressive:
|EES||WisdomTree SmallCap Earnings Fund||48.2%|
|IWM||iShares Russell 2000 Index Fund||25.3%|
|IJR||iShares S&P SmallCap 600 Index Fund||22.2%|
|*As of October 16, 2009|
Disclosure: No positions at time of writing.