10 Most Useful New ETFs Of 2011 (For Buy-And-Hold Investors)

by on December 25, 2011 | ETFs Mentioned:

This past year was the most active ever for the exchange traded industry in terms of product development; the launch of more than 300 new products shattered the record set in 2010. And innovation continues to run high in the industry; the creativity of issuers is still impressive, as many of the ETFs that have debuted over the last year have offered access to new asset classes and strategies. There are no doubt still stones to be overturned, and many new opportunities in the ETF space.

Yesterday, we profiled a number of the new additions to the ETF lineup in 2011 that had been a big hit with investors; nearly 20 of the exchange-traded products launched in 2011 have already accumulated more than $1 billion in assets. Today, we’ll take a look at ten ETFs that debuted in 2011 that haven’t been quite as successful pulling in assets, but that may be useful tools for investors looking to build a balanced, long-term portfolio [see How To Invest Like UBS In 2012]. 

Given that focus, the list below includes primarily broad-based securities that could be used within a buy-and-hold portfolio; it doesn’t include any of the more precise instruments to debut over the last year that can be used to achieve targeted allocations in connection with a more active, tactical investment strategy [for more ETF ideas, sign up for the free ETFdb newsletter]:

1. Scottrade’s Super-Cheap ETFs

The first item on this list is actually a complete suite of ETFs. FocusShares was resurrected this year as a division of Scottrade, offering not the hyper-targeted suite of ETFs that it put forth in its first go-round, but broad-based domestic equity ETFs designed to deliver cost efficient access to core asset classes.

With expense ratios as low as five basis points (FMU and FLG currently share the title of “cheapest ETF”), each of these ETFs is among the cheapest in its ETFdb Category. And they’re also available commission free in Scottrade accounts, further enhancing the appeal to cost-conscious investors.

The FocusShares ETF lineup currently consists of the broad-based Morningstar U.S. Market Index ETF (FMU), funds targeting large caps (FLG), mid caps (FMM), and small caps (FOS), and 11 different sector-specific funds [ETFdb Pro members can see the Cheapskate ETFdb Portfolio; sign up for a free 7-day trial for access to more than 30 different all ETF model portfolios].

2. WisdomTree Global Real Return Fund (RRF)

Inflation has been on the mind of financial advisors more and more in recent months, as anxiety over the long-term impact of big increases in the money supply has spiked. Many looking to protect client portfolios from the adverse impact of a jump in CPI have embraced inflation-protected bonds, an asset class that has some potentially serious limitations as an inflation hedge. But other innovations in the ETF space have been put forward that take a more comprehensive approach to addressing the complex challenge of inflation [see Six Noteworthy ETF Innovations].

RRF is an actively-managed ETF that seeks to deliver total returns that exceed the rate of inflation over the long-term. To achieve this, RRF takes a multi-pronged approach; the underlying portfolio consists of both domestic and international inflation-protected bonds, as well as exposure to commodities. The commodity portion of the portfolio includes both long-only exposure and a long-short strategy guided by a rules-based approach, allowing for levels of complexity and flexibility other “inflation fighting” ETFs simply do not have [see Under The Hood Of RRF].

This ETF probably won’t deliver massive gains in 2012–or perhaps in any year. And it probably does not deserve a massive allocation in any long-term, growth-oriented portfolio. But it can certainly be useful as a core holding that is capable of delivering some degree of inflation protection that goes beyond simpler ETFs such as TIP.

3. SuperDividend ETF (SDIV)

SDIV joined the growing list of dividend ETFs in 2011, offering a unique approach to accessing dividend-paying stocks. Whereas some dividend-focused ETFs focus primarily on consistency and stability of dividends, SDIV is designed to maximize the dividend yield. Consisting of 100 stocks from around the globe with the highest dividend yields, SDIV has managed to make some hefty distributions in a relatively short period of time (the 30-day SEC yield was a whopping 9.5% at the end of November).

The other unique element of SDIV is the weighting methodology; the underlying index is equal-weighted, which means that no one name accounts for a meaningful portion of total fund returns [see A Tale Of Two Dividend ETFs: SDIV vs. VIG]. For investors looking to boost the current returns from the equity side of their portfolios, SDIV might be worth a closer look. It should be noted that this ETF comes with a fair degree of risk, since many of the companies included in the portfolio are smaller and potentially volatile stocks.

4. Growth At A Reasonable Price ETF (GRPC)

This ETF debuted in 2011 as part of Russell’s push into the ETF industry with a suite of “investment discipline” funds. GRPC selects stocks from the Russell 1000 Index, making it a potentially attractive alternative to ETFs in the Large Cap Blend ETFdb Category. The underlying index is designed to identify companies with:

  • Consistent earnings as measured by average to low earnings per share volatility over the past five years
  • Profitability as demonstrated by an average to high return on equity over the past five years
  • High quality as measured by an S&P Quality Rank of B or above or a low debt to equity ratio
The growth-at-a-reasonable-price (GARP) strategy is nothing new; investors have been employing versions of this strategy for decades–many of them with great success. But the availability within the ETF wrapper allows low maintenance, low cost access to all types of investors. Identifying ETFs that offer access to compelling methodologies, such as GRPC, won’t generate huge amounts of alpha over more traditional, plain vanilla ETFs. But it might be an opportunity to add a few extra basis points or optimize your risk profile, which can obviously be very important upgrades.

5. EGShares Low Volatility Emerging Markets Dividend ETF (HILO)

The universe of emerging markets ETFs continues to expand and evolve, a very positive development considering the importance of this asset class to long-term portfolios. One of the more innovative additions to the Emerging Markets ETFdb Category in 2011 came in the form of HILO, which is designed to deliver high levels of current income while exhibiting significantly less volatility than the MSCI Emerging Markets Index (the index which the popular EEM and VWO seek to replicate).

HILO can be an efficient way to both enhance the dividend yield on a portfolio and smooth overall volatility, while still maintaining the considerable upside associated with emerging markets stocks [see Under The Hood Of HILO].

6. Morningstar U.S. Market Factor Tilt Index Fund (TILT)

Similar to the first item on this list, TILT was also launched by a firm making its second attempt at success in the ETF industry. This fund from Northern Trust offers broad-based exposure to the U.S. economy, but with a couple “tilts” compared to traditional cap-weighted benchmarks such as the Russell 3000. Specifically, TILT’s portfolio maintains heavier allocations to small cap and value stocks under the premise that these corners of the market are the key to generating superior risk-adjusted returns over the long run.

Given this objective, TILT could be used as a means of establishing “one stop” exposure to U.S. equities, potentially as a replacement to ETFs in the All Cap Equities ETFdb Category such as the Vanguard Total Stock Market ETF (VTI) or Russell 3000 Index Fund (IWV).

7. Madrona Forward Global Bond ETF (FWDB)

This actively-manged ETF is, in our opinion, the only ETF option out there for achieving truly global bond exposure in a single ticker. Most of the products in the Total Bond Market ETFdb Category focus primarily on investment grade U.S. fixed income securities. FWDB, which is structured as an ETF-of-ETFs, includes positions in corners of the market not found in products such as AGG or BND. In addition to allocations to core bond holdings such as Treasuries and investment grade corporates, FWDB includes junk bonds, Build America Bonds, domestic and international TIPS, emerging market bonds, convertible debt, and mortgage-backed securities [see Better-Than-AGG Total Bond Market Portfolio].

FWDB is a bit expensive–the all in expense ratio is about 1.15%–but the breadth and depth of exposure offered is unmatched by any other products in the bond ETF universe. For those looking to bring balance to the fixed income side of their portfolio, FWDB can be a low maintenance way to expand beyond U.S. borders.

8. PowerShares Fundamental Investment Grade Corporate Bond Portfolio (PFIG)

Alternative weighting strategies have become increasingly popular in recent years, as investors have embraced new strategies for weighting exposure to individual stocks. Now this line of thinking is spreading to he fixed income arena as well, as several products are shunning traditional weighting strategies that give the biggest weightings to the biggest debtors [see Are Bond ETFs Broken?].

PFIG, which launched in September, is the only ETF in the Corporate Bonds ETFdb Category to implement the RAFI weighting methodology. That technique involves considering fundamental measures of a company such as cash flow and sales to determine weightings, an approach that should have obvious intuitive appeal to investors frustrated by the potential shortcomings in most fixed income indexes [see Q&A On RAFI Weighting With Rob Arnott]. As such, this fund could be an intriguing replacement for products such as LQD; PFIG might be worth a closer look as a source of decent current returns without excessive risk.

9. iShares MSCI All Country World Minimum Volatility Index Fund (ACWV)

The past year has seen issuers continue to refine the exposure offered by equity ETFs, allowing investors to more precisely set their risk exposures. iShares is one of several issuers to roll out low volatility ETFs that target stocks within a broad index that have historically exhibited low volatility relative to their peers. The appeal of this approach is simple; low volatility stocks limit the potential downside losses of a portfolio, while still allowing investors to participate in upside appreciation in equity markets [see Low Volatility ETFdb Portfolio].

It’s always been assumed that the additional risk component of high volatility stocks will translate into higher returns over the long run–but many are now beginning to reassess the validity of that theory. Limiting losses during bear markets can be very beneficial to investors, as many learned the hard way during the recent recession.

ACWV can be a useful tool for scaling back risk exposure without being so drastic as to move entirely to cash or bonds. The broad focus of this fund makes it an easy way to achieve exposure to just about every every major economy in a single ticker, meaning that ACWV could be found at the core of many portfolios.

10. Hedge Replication ETF (HDG)

While the bulk of ETF assets are in products focusing on stocks and bonds, more and more investors are utilizing the exchange-traded structure to tap into “alternatives,” a term that covers a wide range of strategies that are generally useful thanks to low correlation coefficients. HDG is unique in that it seeks to deliver hedge fund like returns through a vehicle that features low costs, complete transparency, and significant liquidity. The index to which HDG is linked uses a systematic model to establish either long or short positions to six different factors: 3-month T-Bills, the S&P 500, MSCI EAFE Index, MSCI Emerging Markets Index, the Russell 2000, and the ProShares UltraShort Euro ETF (EUO). Because positions can be either long or short, HDG has the potential to deliver positive returns in any environment [see ETFs To Smooth Volatility: Looking At Some Long/Short Options]. In its relatively brief time on the market (the ETF debuted in July), the results have been impressive; HDG has delivered positive returns with very low volatility–a combination that is obviously very attractive to long-term investors.

HDG probably won’t be the largest allocation in any long-term portfolio, but a smaller position in this fund–somewhere in the neighborhood of 5% or 10%–can potentially bring diversification benefits to traditional stock-and-bond portfolios [see Cheapskate Hedge Fund ETFdb Portfolio].

Disclosure: No positions at time of writing.