The ETF universe is one that is continually changing in an evolutionary fashion. Each year new ETFs are created and others delisted in a Darwinian-style “survival of the fittest” environment that allows the best funds to thrive while the weakest die off.
Through the first six months of 2014, we have seen total U.S.-listed ETF assets surpass $1.8 trillion. That includes net inflows of $73 billion this year alone. The total count of exchange-traded products, including both ETFs and ETNs, now stands at more than 1,600 available options with the list expanding rapidly.
Based on current growth rates, and the continued success of both the equity and bond markets, we could easily surpass the $2 trillion mark before year end. However, with so many funds to choose from and more being introduced each month, separating the best new ETFs from plain vanilla offerings is becoming a harder task.
With that in mind, I felt it would be prudent to examine some of the best new ETFs that have been introduced this year and profile some of the rising themes.
Easily the strongest ETF launch of the year is the First Trust Dorsey Wright Focus 5 ETF (FV), which has already garnered more than $340 million since being introduced in March. The fund uses a multi-factor selection methodology to select a universe of 5 other First Trust ETFs with the greatest potential to outperform their peers.
This system was developed by Dorsey, Wright & Associates using a relative strength ranking methodology. The index is recalculated on a weekly basis to determine if any funds have fallen out of favor and may need to be replaced by with another sector or opportunity. In addition, each ETF within the fund is rebalanced to an equal weighting. Right now, FV is heavily focused in biotechnology, healthcare, internet, consumer staples, and consumer discretionary stocks.
While performance chasing can often lead to undesirable results for the majority of investors, this ETF may be uniquely suited to outperform under favorable circumstances. The frequent rebalancing and stringent selection methods may ultimately lead to periods of strong momentum that favor FV. However, there is always a risk of being in hot sectors that fall out of favor very quickly as well.
Another interesting trend in the first half of 2014 is the release of international ETFs that include low volatility and currency-hedged products. WisdomTree, iShares, and Deutsche Asset & Wealth Management are continuing to expand their lineup of these ETFs to build off the success of earlier funds.
The ability to mitigate the risk of currency fluctuations or select a sub-set of stocks with lower overall price volatility is an attractive quality to many ETF investors selecting overseas exposure. The iShares Currency Hedged MSCI Germany ETF (HEWG) is one example that has already accumulated more than $50 million in assets since its January release.
Another ETF designed to capture international stocks with undervalued characteristics is the Cambria Global Value ETF (GVAL). This fund selects approximately 100 stocks from a universe of 45 countries that offer strong value metrics. According to the latest fact sheet, the top country weightings in GVAL include Brazil, Ireland, Austria, and Italy. The fund owns a broad range of company sizes, sectors, and industry groups to maintain a diversified mix as well. This ETF has accumulated more than $50 million in assets in a short period of time since its inception.
Finally, an innovative new ETF in the precious metals space is the Merk Gold Trust ETF (OUNZ). This fund owns physical gold in a vault similar to the SPDR Gold Trust (GLD), but allows small investors to redeem their shares as tangible gold for a small fee. This breaks down one of the barriers to owning a precious metal ETF that traditional gold investors have preached about for some time now and allows for greater flexibility and liquidity. This ETF currently has $48 million under management in just a few short months.
While this list constitutes a small subset of the 100 new funds released so far in 2014, each represents a unique index or stock selection methodology that is already catching investors’ attention. That initial success is half the battle when it comes to starting a new ETF with an unproven track record. I look forward to reviewing new funds that are slated to be released in the second half of the year which may include a bitcoin ETF, non-transparent ETFs, and several actively managed ETFs from PIMCO.