Despite it being the dog days of summer, new exchange traded funds (ETFs) continue to hit the tape, albeit at it a slower pace than the beginning of the year. This week, investors were treated to two new funds. Both of which offer interesting takes on their respective asset classes and strategies.
A New Take on Modern Portfolio Theory
When it comes to portfolio construction, one prevailing topic reigns supreme. And that’s modern portfolio theory (MPT). In a nutshell, MPT is basically why we diversify our portfolios – different asset classes perform differently at different times. The non-basic definition, and why it works, involves mean variances and market efficiencies.
The iSectors Post-MPT Growth ETF (PMPT ) hopes to take the guesswork out of the second part.
The iSectors ETF, which is not affiliated with BlackRock’s iShares in anyway, looks towards modern portfolio theory in a new way. The fund is designed to provide returns that outperform the S&P 500 index with lower downside risk over a complete market cycle. It will try to accomplish this goal by using a property model that looks at monthly changes in about a dozen different economic and capital market indicators, including interest rates, money supply, inflation and unemployment rates.
After it has determined its proper allocation for the correct monthly stage of the market cycle, PMPT will allocate its AUM towards nine different asset classes with low correlations. These include basic materials, bonds, energy, financials, gold, healthcare, real estate, technology and utilities. The fund can hold up to 50% of its portfolio in bonds, 25% in gold, and the remaining asset classes being capped at 30% each.
Rather than hold individual stocks or bonds, PMPT is an “ETF of ETFs” and will hold a combination of other liquid ETFs. Top holdings currently include the Market Vectors Gold Miners ETF (GDX ) iShares Barclays 20+ Year Treasury Bond (TLT ) and iShares Dow Jones U.S. Financials (IYF ).
Investors should also take note that PMPT can, and does, invest in leveraged ETFs. Also of note is the new ETFs very high expense ratio of 1.55%, which puts it on par with many mutual funds in terms of cost. This could be a high hurdle for the fund to overcome, if performance is just so-so.
A MLP Repeat
The second launch this week is more of a repeat than a new ETF. Citigroup, which most investors don’t even realize has a line of ETFs/ETNs, added the C-Tracks Miller/Howard MLP Fundamental Index, Series B ETN (MLPE ) to its arsenal on August 11.
As the name implies, MLPE will track the Miller/Howard MLP Fundamental Index. The index takes a smart-beta approach to the world of MLPs by using screens to build out its holdings. These screens evaluate distribution growth, capital expenditures and distribution coverage for the wide world of master limited partnerships. The index then uses and applies a two-tiered modified equal-weighting scheme when building its portfolio.
If that sounds familiar, there’s a good reason. Citigroup also offers the C-Tracks Miller/Howard MLP Fundamental ETN (MLPC ). MLPE and MLPC are almost identical. They track the same index and hold the same MLPs. The difference is the end date of the ETN, as well as the expense ratio. The new MLPE is slightly cheaper, at 0.85%.
The reason for launching the series B ETNs comes down to liquidity. Citi has stopped issuing shares of MLPC. Under that scenario, the ETN could become unhinged from its net asset value. In order to keep volumes and that problem at a minimum, Citi launched an identical fund. UBS has done similar launches with its family of ETNs.
For investors, the cheaper expense ratio might be enough of a reason to jump ship and buy the other fund.
The Bottom Line
For investors, both PMPT and MLPE offer “boosted” takes on more traditional fair. For PMP, that means generalized portfolio construction and for MLPE, it means fundamentals in the MLP asset class. At the end of the day, both are prime examples of how far ETFs have come over the years.
