Never Judge an ETF By Its Name

by on June 30, 2014 | ETFs Mentioned:

While the rapid development of the ETF industry has made it easy for mainstream investors to tap into virtually any asset class, many still prefer to utilize these investment vehicles as building blocks for their portfolios. These “core” holdings are often plain-vanilla funds, like the S&P 500 ETF (SPY), and though they are not the most “unique” funds, they do have the ability to deliver stellar returns over the long run [see 7 Underappreciated Core ETFs].

Many investors assume that plain-vanilla ETFs do not have the ability to offer significant capital appreciation, given the tendency for these funds to be broadly diversified and tilted towards the “safer” side of the risk spectrum. But for traditional buy-and-hold investors, these investments can certainly pay off without adding too much risk to your portfolio. 

In this piece, we highlight five so-called hidden gems of the “plain vanilla” ETF space – all of which have posted triple-digit returns over the trailing five-year period. (Please note that all data is as of June 20, 2014.)

Plain-Vanilla Standouts

S&P Pure Value ETF (RPV)

Over the trailing five-year period, Guggenheim’s Pure Value ETF (RPV) has gained over 240%. In the last three years, the fund is up nearly 90%. 

Unlike traditional style ETFs, RPV seeks to remove the overlap between growth and value by identifying only those companies with the strongest value characteristics. Given the strict criteria, RPV’s portfolio holds only 120 individual securities, the majority of which are large- and mid-cap stocks.

S&P Pure Growth ETF (RPG)

Another Guggenheim offering, the S&P Pure Growth ETF (RPG) also seeks to remove the overlap between growth and value stocks. A look at the two funds’ track record certainly gives credit to the “pure methodology.” Over the trailing five-year period, RPG has gained nearly 198%, and over the last three years, the fund is up nearly 75%. 

Like RPV, RPG also has a relatively small portfolio of about 110 individual holdings. The fund gives meaningful allocations to a wide array of sectors, though consumer cyclical, technology, healthcare, and financial services equities receive the largest allocations. 

S&P MidCap Earnings Fund (EZM)

This WisdomTree fund seeks to measure the performance of earnings-generating companies within the mid-capitalization segment of the U.S. equity market. Unlike traditional cap-weighted funds, EZM selects only those mid-cap companies that have generated positive cumulative earnings over their most recent four fiscal quarters.

EZM’s unique focus on earnings has obviously paid off: the fund has gained roughly 194% over the trailing five-year period, and over 70% within the last three years [see 101 ETF Lessons Every Financial Advisor Should Learn]

MidCap Dividend Fund (DON)

Like EZM, DON also uses an alternative weighting methodology to target mid-cap stocks, but it does so with a focus on dividends. The fund’s underlying index is dividend-weighted annually to reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year. 

Over the trailing five-year period, DON has gained nearly 194%, and over the last three years, the fund is up over 67%. 

S&P Midcap 400 Pure Value ETF (RFV)

Yet another Guggenheim “pure” style ETF, RFV seeks to offer investors exposure to mid-cap companies that have the strongest value characteristics. The fund’s portfolio consists of about 95 individual holdings, the majority of which are actually small-cap stocks. Currently, financial equities comprise 20% of RFV’s total assets. Industrials, technology, consumer cyclical, and healthcare sectors are also given meaningful exposure.

In the last five years, RFV has gained just over 193%. Over the trailing three-year period, the fund is up 64%. 

The Bottom Line

While all of the funds on this list are very simple products, they have all managed to post stellar returns in recent years. Investors should realize that plain vanilla ETFs can in fact offer great returns, while at the same time they provide greater diversity and lower risk than other high-flying, hyper-targeted funds. 

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Disclosure: No positions at time of writing.