As the ETF industry has grown by leaps and bounds over the past few years, innovation has been a recurring theme in the space. Although some of the new exchange-traded products now hitting the market offer access to “plain vanilla” asset classes and indexes, the ETF expansion has been fueled primarily by first-to-market products that open up new asset classes and investment strategies. From leveraged platinum and palladium ETNs to Australian Bonds to soybeans, 2011 has been a year of firsts in the ETF industry [see Six Noteworthy ETF Innovations].
As a result of this trend, ETFs have become increasingly specialized, granular tools. The vast majority of exchange-traded products now available to U.S. investors are likely of little or no use to those with a buy-and-hold strategy; much of the ETP universe is simply too targeted for those with a long-term time horizon. But these products are powerful tactical tools to more active advisors and individuals looking to implement shorter-term tilts towards asset classes believed to be poised for short-term outperformance, and the wave of new launches in recent years has added a number of precise tools to the toolbox [see 25 Things Every Financial Advisor Should Know About ETFs] .
The movement towards targeted products is perhaps most evident in the technology sector, where there are a number of quirky, narrowly-focused exchange-traded products. There are now almost 40 ETFs in the Technology Equities ETFdb Category, and while most of the assets are in “plain vanilla” products such as the Technology SPDR (XLK) and Vanguard Information Technology ETF (VGT), there are a number of more granular exchange-traded products as well [for more ETF insights, sign up for the free ETFdb newsletter]:
iShares PHLX SOX Semiconductor Index Fund (SOXX)
This ETF seeks to replicate an index comprised of about 30 different semiconductor manufacturers. Given this targeted focus, the performance of SOXX will generally be tied to the demand for semiconductors, which are now used in a wide variety of products. The portfolio of SOXX consists of some well-known names–such as Intel and Texas Instruments–as well as some smaller companies that probably aren’t on the radar screens of most investors; small and mid cap stocks make u about half the portfolio [see SOXX Scorecard & Ranking].
SOXX has delivered some impressive returns over the last three years, but has struggled to find its footing somewhat in 2011; this ETF is down about 8% on the year.
iShares S&P GTSI Networking Index Fund (IGN)
This ETF offers investors exposure to U.S traded multimedia networking stocks, with heavy exposure to a number of well known tech giants. Some major holdings in this portfolio are Cisco Systems, Motorola Solutions, and Qualcomm. This portfolio does a great job of diversifying its market cap exposure from small cap to giant cap, all around 20%-30% in each category [see IGN Holdings]. One concern of the networking industry is that it has been faced with increasing competition from cloud computing in the recent years.
The fund is down about 16% for the year, which might present itself to be an attractive entry point for some investors.
First Trust ISE Cloud Computing Index Fund (SKYY)
Earlier this year, First Trust rolled out the first ETF that focuses exclusively on the cloud computing industry. This fund will track the ISE Cloud Computing Index, a modified equal-dollar weighted index. Cloud computing is the storage of data or software outside of a computer, while still allowing users to access it from anywhere, anytime on the internet. Although the underlying index that the fund seeks to track is the cloud computing index, investors should consider how much the actual exposure to the industry the fund offers. The fund includes holdings such as Amazon, Cisco, or Oracle, all of which are engaged in the networking industry. Because there are few pure play, public cloud computing companies, SKYY includes a number of broad-based tech companies [see SKYY Fact Sheet].
Invesco PowerShares Nasdaq Internet Portfolio (PNQI)
This ETF tracks the performance of the largest and most liquid U.S. companies engaged in internet-related businesses. These companies are involved in a number of unrelated businesses, from online market places to search engines. Giant, large, and medium cap equities make up about 80% of this fund. The top three holdings are well known companies, Amazon, eBay, and Google. This ETF also offers some exposure to China at around 14% through holdings such as Baidu.
Compared with the outstanding return over the past three years, the fund is only up around 3% for the current year [see PNQI Returns].
Guggenheim China Technology ETF (CQQQ)
This is the first U.S.-listed ETF that offers investors exposures to the fast growing Chinese technology sector. Companies in this portfolio include semiconductor manufacturers, search engine and Web-based firms, and manufacturers of computers and other gadgets. The portfolio is fairly concentrated with only a total of around 40 individual holdings. The top three holdings are Baidu, Tancent, and Sina [see Special Report: China ETFs In Focus].
Although the fund is down about 16% for the year, it offers high growth potential due to the nature of its exposure.
Invesco PowerShares Lux Nanotech Portfolio (PXN)
This ETF tracks companies involved in developing, manufacturing, and funding nanotechnology applications. Investors often overlook this ETF due to the risk and volatility involved in nanotechnology. There are only about 21 individual holdings in this portfolio, making it extremely shallow. Close to half of this fund is allocated towards micro cap companies, which means that perhaps this ETF might be better suited for investors with a high risk tolerance [see Ten ETFs No One Is Thankful For].
UBS ETRACS ISE Solid State Drive Index ETF (SSDD)
This ETN tracks the ISE Solid State Drive Index using an equal weighted allocation methodology. The hyper-targeted focus of this portfolio results in a total of 11 individual holdings currently. Solid state drives are data storage devices that serve as an alternative to traditional hard drives. The popularity of this product comes from the fact that they are less prone to damage and offer lower access time and latency. Some well known companies in this portfolio are Western Digital, Seagate Techonology, and OCZ Techonology [see SSDD Fact Sheet].
UBS ETRACS Internet IPO ETN (EIPO)
This ETN tracks Internet-related companies that have recently completed an IPO and have been traded publicly for less than three years. EIPO re-balances monthly so it will generally not participate in the first day of trading for newly listed companies. The underlying index consists of companies that are in either Internet Software & Services, Internet & Catalog Retail, or Media industry [see Tech ETFs In Focus: Highlighting Some Hyper-Targeted Options]. A number of companies included in this fund were high profile IPOs such as Pandora Media, OpenTable, and LinkedIn.
First Trust NASDAQ CEA Smartphone Index Fund (FONE)
This ETF offers pure play exposure to companies engaged in the smartphone segment of telecommunication and technology sectors. Smartphones have been gaining market share over the recent years with new products constantly reaching the market. The smartphone industry is seen as one of the few high growth industries left in developed markets. The portfolio is well diversified for a hyper-targeted ETF with the top ten holdings only accounting for around 28% of total holdings [see FONE Holdings].
Global X Social media Index ETF (SOCL)
This recently launched ETF seeks to track the Solactive Social Media Index, including companies that provide social networking, file sharing, and other web-based media applications. Social media usage has experienced large growth in recent years, with research showing that more than 80% of Fortune 100 companies use branded social media channels [see Global X Launches Social Media ETF]. Some well known social media companies included in this portfolio include Google, Renren, and LinkedIn.
Disclosure: No positions at time of writing.