Over the course of the last few years, the ETF space has grown immensely. What started off as a handful of low-cost, broad-based funds has now turned into a space of nearly 1,400 products with investment methodologies ranging across the board. The innovation in the space has led to a number of unique products that offer exposure to asset classes like commodity futures, volatility, and even more specialized funds that target something like A-Shares on the Shanghai Stock Exchange. But for all of the doors that the ETF industry has opened, there are still a number of holes in the overall lineup. Below, we outline several funds that still don’t exist yet, with some surprising results [see also 25 Things Every Financial Advisor Should Know About ETFs].
United Kingdom Small/Mid Cap ETFs
When it comes to country exposure in ETFs, the U.S. obviously takes the crown, with over 500 funds dedicated within our borders. But moving out to second place, our neighbors across the pond have 269 funds that currently offer some manner of exposure to the U.K. economy. But lineup consists of just one fund that is solely dedicated to the UK; the MSCI United Kingdom Index Fund (EWU). For the sixth largest economy in the world, and the second most represented by ETFs, it is a little alarming that there is just one fund that is wholly focused on the UK. One of the biggest gaps in exposure comes from small and mid caps, or lack thereof. There are currently ETFs that offer small cap exposure to nations like Germany, China, and Brazil as well as mid-caps for a slew of other countries. With EWU primarily focused on large cap holdings, the small and mid cap sectors are denied, leaving a major opportunity for an issuer to be first to market with one of these products [see also Not All Mid Cap ETFs Are Created Equal].
Note that this argument could be expanded to countries like France, Switzerland, the Netherlands, and any number of other important economies that ETFs have yet to fully represent [see our Euro Free Europe Portfolio].
One of the aspects of investing that ETFs have done well to adopt is sector investing. A number of investors like to dial in exposure to just a particular sector, to make a more concentrated play on the current market environment. And the sector products don’t just stop at U.S. exposure; China and Brazil among others have numerous sector products dedicated to their economies, with plans for more on the way [see also ETF Sector Rotation Strategies: Beyond The SPDRs].
So what’s missing? An ex-sector product. There are a number of investors who like the overall economy of a certain region, but would like to avoid a certain sector. A product of this nature would offer exposure to all but one or more sectors, intentionally narrowing exposure. An ETF of this sort could be particularly welcomed in the emerging market space, as a number of funds tend to overweight financials and energy, skimming on the remaining market segments. The argument could be made that some products already unintentionally offer this kind of exposure by effectively skipping some sectors, but a more targeted product with this strategy would certainly be a strong addition to the ETF lineup.
WisdomTree offers a pair of ex-financials ETFs, and the performance of DTN and DOO relative to broad market funds is pretty compelling; stripping out financials exposure gives a nice performance boost.
Alcohol, gambling, tobacco. Just a few in the long list of vice investments that currently exist on the market. The attraction here comes from the relatively inelastic demand; even with the economy in the toilet people will continue to smoke and succumb to their various vices. And with companies like Phillip Morris and Anheuser-Busch InBev up for grabs, it is rather shocking that one of these funds hasn’t already hit the market. The closest thing to a vice fund comes from the Market Vectors Gaming ETF (BJK), which focuses on companies that derive more than 50% of their revenues from the global gaming industry. While this fund has been mildly successful, $107 million in assets, a more broad-based fund has plenty of room to run, especially considering the robust dividend yields that some of its underlying holdings would pay out [see also Who Else Wants A Beer ETF?].
State-Specific Bond ETFs
Currently, there are ETFs that offer exposure to California and New York muni bonds, but the buck stops there. The remaining 48 states have no exchange-traded representation, despite the wide variety of mutual funds that hone in on state-specific bonds. Recently, the fixed income ETF space has been expanding into new territory with bond funds now dedicated to China, Germany, and plans for others. So if we can dive into foreign countries, we should be able to at least make a better representation of our own states. Currently missing from the lineup, Texas, Florida, Illinois, and Pennsylvania, the next four most populated states after California and New York (Texas actually ranks second but has no ETF exposure). For those interested in the already existing products, take a look at our ETFdb Categories dedicate to California and New York.
Disclosure: No positions at time of writing.