ETFs have come along way in their relatively short existence, evolving from plain vanilla funds tracking major equity benchmarks to include more exotic products such as ETFs with triple leverage, and ETFs that employ long/short strategies, hedge fund tracking ETFs, and actively-managed funds. While some investors point to the several dozen funds that have struggled to attract capital as a sign that the ETF market has become over-saturated, the warm reception that many new funds have received is an indication to the contrary.
This year promises to be an exciting one for the ETF industry, with dozens of highly-anticipated new products in the pipeline (see the Seven Most Anticipated New ETFs of 2010). The ETF industry has expanded greatly since the first installment of ETFs That Don’t Exist, But Should, with some of our ideas becoming reality. And while there’s now an ETF offering exposure to just about every corner of the investable universe, we still think there’s plenty of room for growth and untapped potential. Below, we present seven more ETF ideas we think would be popular with investors. For more in-depth coverage of the ETF industry, sign up for our free ETF newsletter.
1. Online Education ETF
One industry that has been able to thrive in the recession is the world of online education. As the number of out-of-work Americans with minimal job prospects increases, many are turning to the online education world to expand their skill sets in order to compete in a knowledge based economy. Not too long ago, online education found itself on the fringe, struggling to gain market share from brick-and-mortar universities. But fortunes have changed, and now nearly 25% of all college students take a course online at some point in their careers. This has led to incredible growth for the industry which has far outpaced enrollment growth in traditional learning environments.
The industry receives a large portion of its revenues from the federal government, which can be a good thing when the government spends freely, but a definite investment risk should Washington be forced to clamp down on spending programs. Also, many professors remain entrenched against the idea of online education and opinions have changed little over the past decade on the subject. In a recent survey by the Sloan Consortium less than one-third of chief academic officers believe that their staff accept the value and legitimacy of online education, suggesting that there are limits to this fast growing industry. However, despite the risks, an online education ETF would be very intriguing for investors looking to add a relatively recession-proof sector to their portfolio.
Possible top allocations: Strayer University, Blackboard Inc., and Apollo Group.
2. Video Game ETF
One sector that has been able to rival the growth of ETFs over the past decade is the video game industry. In 2000, total video game sales approached $8 billion. In 2009 they totaled more than $20 billion. It seems logical for this massive and fast growing industry have its own ETF with both game developers and hardware manufacturers being included in the fund. Demographics also favor this fast growing industry. When most people think of a “gamer” they probably think of a teenage male, but recent figures suggest that this is not really the case. Recent statistics say that the average age for a gamer is 35 and has been playing video games for 12 years, with at least 40% of this group consisting of women. This suggests that the industry has finally hit the mainstream and is being more widely embraced.
However, everything isn’t going smoothly in the video game industry. Game makers face a major threat from the high levels of piracy, with some reports showing as much as 10% of video games being illegal copies. This takes a toll on video game earnings and significantly impacts the ability of firms to grow. However, if the industry is able to get this number under control and continue to innovate, an ETF targeting this sub-sector could be a popular investment.
Possible top allocations: Nintendo, Activision-Blizzard, and EA
3. Mobile Phone ETF
Technology is one of the few sectors that are well segmented in ETF form. There are currently targeted technology ETFs for sub-sectors such as semiconductors, internet architecture, and even nanotechnology. However, one sector is noticeably missing from the list: mobile phones. Mobile phones are everywhere except in the world of ETFs; 3.3 billion people have cell phones and an estimated 1.1 billion cell phones are sold every year, making mobile phones the most popular consumer electronic product on earth. If there is a market for some of the current technology ETFs, it is hard to believe that a mobile phone ETF could not muster the same level of interest among investors.
Arguably the greatest weakness to investing in this industry is the intense competition for market share and the rapid obsolescence of products. Nokia, the long time market leader, has seen its share erode quickly in developed markets as consumers move towards more advanced smart phones. While this competition bodes well for consumers, it can be disastrous for phone manufacturers who have to sink incredible amounts of money into R&D activities in order to stay competitive. This high level of competition could also lead to consolidation in the industry which could help to boost some of the laggards and increase the price of this hypothetical ETF.
Possible top allocations: Nokia, China Mobile, and Qualcomm
4. Travel & Tourism ETF
There are various ETFs that target luxury goods (ROB) and airlines (FAA), but there currently are not any ETFs that focus on hotels, theme parks and cruise ship operators, and other vacation oriented service firms. While these firms have been hit hard by the recession some remain intriguing picks for the long term as more emerging market consumers rise into the middle class and are able to afford more vacations.
Another major advantage to strong firms in this sector is the ‘wide moat’ that the market leaders are able to develop. For example, hotels in exotic or important locations have an advantage that is hard to overcome, and barriers to entry for new firms, especially in the theme park and cruise ship operation segment, are significant. This helps keep competition relatively low and allows firms to maintain market share more easily than other more rapidly changing sectors such as technology.
There are a number of consumer discretionary ETFs currently available, but many of these funds are full of companies that don’t necessarily come to mind when one thinks of discretionary spending, such as Target, Home Depot, and McDonald’s. A travel and tourism ETF would offer investors more of a “pure play” consumer discretionary option.
Possible top allocations: Priceline.com, InterContinential Hotels Group, and Royal Caribbean Cruises Ltd.
5. Fast Food ETF
Despite the ubiquitous nature of fast food, there is no ETF dedicated exclusively to fast food companies. The industry consists of roughly 200,000 restaurants producing $120 billion in yearly revenue in the U.S. alone. Fast food companies have significant international growth prospects as well, especially in international developed markets where consumers are more likely to be able to afford a take out meal. Many companies, such as Yum! and McDonald’s, already derive at least half of their sales from overseas markets, a trend that is sure to continue as they expand operations in emerging economies such as China.
There are currently two main threats to fast food companies; health conscious consumers and volatile commodity prices. It remains to be seen if companies like McDonald’s can come up with healthy alternatives that people will still want to eat. Commodity prices could also negatively impact the profit margins of many fast food firms who rely on stable commodity levels to maintain low prices.
Possible top allocations: McDonald’s, Burger King, and Wendy’s/Arby’s Group
6. Southeast Asia ETF
With a population approaching 600 million, the ten member countries of the Association of Southeast Asian Nations (ASEAN) bloc comprise nearly 9% of the world’s population, roughly double that of the U.S. The countries also combine to form an economy of over $1.5 trillion, putting it on par with Canada or India in terms of nominal GDP. In addition to having a large market, the ASEAN bloc has several other advantages as an investment destination. The bloc has relatively low labor costs and it is a tariff free zone among ASEAN members. The bloc has also worked out free trade agreements with India, China, Japan, Australia, and Korea which helps to ensure friendly trade relations with all of the major Asian economies. However, the ASEAN bloc has had internal strife in the past with member states feuding with each other over territorial disputes, especially Cambodia and Thailand. There has also been significant problems with Myanmar and their junta government most notably after their crackdown of anti-government protests in 2007.
There are individual ETFs for four of the largest markets in Southeast Asia, but no diversified fund offering “one-stop” exposure (similar to the ETF offerings for Europe and Latin America). There is already an index that measures the performance of the top 40 companies from the five biggest ASEAN economies (Indonesia, the Philippines, Singapore, Malaysia, and Thailand). Hopefully an issuer will be working on using this index in the near future or expanding on the idea to form an ASEAN ETF.
Possible top allocations: Maybank, Singapore Airlines, and Telekom Indonesia
7. Newspaper ETF
In our first version of an ETF wish list, we laid out a desire to see an ETF focusing on the global auto industry. Wrapping up this list is another fund focusing on a sector that has been battered and bruised in recent years, but has delivered huge returns to investors who were able to get in at the bottom. E.W. Scripps has turned positive and is up more than 1,000% from its 52 week lows, and Wells Fargo recently upgraded Gannett and New York Times citing an improving market for newspaper advertising. This improved outlook is thanks in large part to reduced competition and abatement of apocalyptic fears about the death of the entire industry. Clearly some names will not survive, but a few will, which could lead to big gains for the survivors.
The key for this industry’s future will be managing online viewership and figuring out how to combine a subscription-based model in print with a free model online. Some websites of newspapers obtain unique views roughly seven to ten times the level of their daily readership. Should the industry be able to successfully integrate these operations, it could have far reaching effects on the media industry.
While the industry has certainly seen better days, an ETF that focuses on print media would be interesting if for no other reason than to see how print media correlates to the overall market.
Possible top allocations: New York Times Co., Gannett, and E.W. Scripps
Disclosure: No positions at time of writing.