Exchange traded funds (or ETFs) have been around since January of 1993. SPY (the S&P 500 index ETF) was the first of its kind, and we’ve watched the industry evolve from there. After SPY, we saw the ETF universe expand to include sectors, international indexes and countries, bonds, and commodities. ETFs have continued to become more specific throughout the years. Tom and Brendan discuss this evolution on the weekly Mullooly Asset Management podcast.
Many new ETFs offer access to different investment factors (value, momentum, low volatility, etc.), strategies, geographic regions and micro-sectors of the economy. To say we’ve evolved from the days of SPY would be an understatement. ETFs normally offer investors a low cost alternative to active mutual funds and are usually more tax efficient investments as well. These positives, along with the growing inventory of fund selection, have rooted ETFs as an industry mainstay.
During the podcast, Tom and Brendan discuss some specific ETFs that highlight just how focused the industry has become. As a reminder: This post/podcast are educational and NOT to be considered investment advice. These are NOT RECOMMENDATIONS TO BUY OR SELL ANY OF THESE ETFs. These are strictly being used as examples of the increased specificity offered by the ETF industry.
Highly Focused ETFs
HSPX – S&P 500 Covered Call ETF – This ETF consists of long positions in the underlying stocks of the S&P 500. It writes calls against these positions to generate income. Writing covered calls is generally considered a conservative, income-generating strategy. However, options may not be for every investor. They might not want to put in the leg work to own the stocks of the S&P 500 and sell options against them. This ETF gives them packaged exposure to this strategy with an expense ratio of 0.65%.
ASHR – Deutsche X-trackers Harvest China A-Shares ETF – This fund was the first US-listed ETF offering exposure to the onshore Chinese equity market (A-shares). Foreign investors have historically had very limited access to this market. The expense ratio for this fund is .80%.
HACK – PureFunds ISE Cyber Security ETF – This ETF offers unique exposure to tech companies that focus on cyber security. This micro-sector has become a growing industry in light of numerous, recent data breaches. The fund has an expense ratio of 0.75%.
HEDJ – WisdomTree Europe Hedged Equity ETF – An additional risk taken by international investors is currency risk. Recently, we’ve seen the dollar rise greatly (+27% May 2014-March 2015). This ETF hedges the currency risk involved with buying European equities. More ETFs offering hedged international equity exposure have begun to pop up as well. HEDJ has an expense ratio of 0.58%.
As you can see, some very specific ETFs now exist. It’s almost become like the App Store. If you can think of a strategy or investment factor you’d like to access, there’s an ETF for that! And if there isn’t, there probably will be one soon.
Is increased accessibility to factors, strategies, regions and micro-sectors good for investors? Nobody likes to be told what to do. We all love being the boss and making decisions on our own terms. The more options, the better! We generally agree with this. However, we also know that investors can be their own worst enemy. Having quick, easy access to numerous options is a good thing, but that doesn’t necessarily mean all investors will benefit from it.
This brings us back to a message we send often: know what you own. If you don’t understand the strategy behind a certain ETF or can’t explain how it brings value to your portfolio, you probably shouldn’t own it. Many people choose to work with a fee-only investment advisor for just this reason. They want help understanding their investments and creating a portfolio that matches their goals and risk tolerance. More specific ETFs offer a way to easily access potentially useful strategies. However, investors need to fully understand these products and assess whether or not they bring value to their portfolio.