Top 10 Most Exotic ETFs

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The ETF world is quickly evolving, and sometimes it's all but impossible to keep up with the pace and scope of innovation.

With over 1,400 ETFs now trading and just about every corner of the market covered, issuers are increasingly launching exotic products to complement the saturated beta-strategy market.

A slew of interesting, some might even call wacky, ETFs have launched in recent months that can make your head spin just trying to decipher what they're trying to achieve.

Most of them come with pretty hefty expense ratios, and most investors probably don't even know they exist. Not surprisingly, many of these existing products have little to no assets and are probably on their way to extinction.

It goes without saying that most of these exchange-traded funds and notes are probably not for the average investor looking for broad equity exposure.

Still, following these new launches puts into perspective just how complex the industry has become, and reminds me of one of the most basic lessons of investing:Know what you own.

So, here's a list of my top 10 most exotic ETFs and ETNs in existence.

For a list of underlying indexes, expense ratios, launch dates, assets under management and one-year returns, see the table at the end of the article.

10. Forsensic Accounting ETF (NYSEArca:FLAG)

This newcomer recently launched through Exchange-Traded Concepts. FLAG uses its forensics expertise to select and weight its holdings based on earnings quality. It combs through balance sheets, cash flow statements, and income statements of the 500-largest U.S. companies to assign each a letter grade from "A" to "F," then weights according to the score, in a tiered structure.

9.  AlphaClone Alternative Alpha ETF (NYSEArca:ALFA)

ALFA scopes out the holdings of hedge funds in 13F filings, which are disclosed to the public 45 days after every quarter. After filtering hedge funds based on rankings and size, ALFA combines their ideas with its own proprietary methodology to piggy-back on the holdings of some of the top hedge fund managers. ALFA has the ability to short positions for hedging purposes.

8.  Etracs Fisher-Gartman Risk On ETN (NYSEArca:ONN) and Etracs Fisher-Gartman Risk Off ETN (NYSEArca:OFF)

ONN and OFF track indexes created by Mark Fisher and Dennis Gartman. They attempt to provide investors exposure to securities believed to beneficial during "risk on" and "risk off" macro global environments. ONN and OFF include a hodgepodge of equities, sovereign bonds, commodities and currencies. Each index has 150 percent long exposure and 50 percent short exposure, and is rebalanced quarterly.

7.  Guggenheim Insider Sentiment ETF (NYSEArca:NFO)

This alpha-seeking ETF scopes out 100 U.S. companies that are seeing the most significant insider-buying trends and favorable earnings estimates by Wall Street analysts. The fund looks at the number of insiders buying, as well as the size of the purchases, but doesn't account for any insider selling. NFO is rebalanced annually.

6.  Credit Suisse Merger Arbitrage Liquid ETN (NYSEArca:CSMA)

CSMA targets companies from developed countries in North America and Europe. It's one of three products that attempt to capitalize on spreads that can develop after merger announcements. The ETN takes a long position in companies being acquired in proposed cash deals, and will also take a short position in the acquiring companies in cases of a stock (or stock and cash combination) deal.

5.  Credit Suisse Gold Shares Covered Call ETN (NasdaqGM:GLDI)

A newbie that just launched in January 2013, GLDI holds the SPDR Gold Trust ETF (NYSEArca:GLD), while writing covered calls on those shares. It sells about 3 percent out-of-the-money calls each month. This is an income-generating strategy that could work well unless the price of gold plummets since GLDI has downside exposure to GLD.

4.  Guggenheim Spin-Off ETF (NYSEArca:CSD)

CSD holds roughly 25 U.S.-listed companies that have been spun off through an IPO or an equity carve-out in the past 30 months. The fund naturally has a small- to micro-cap tilt and has a global reach. CSD rebalances semiannually. Recent top holdings include Fiesta Restaurant Group, Marathon Petroleum, Phillips 66 and TripAdvisor.

3.  Etracs Daily Long-Short VIX ETN (NYSEArca:XVIX)

XVIX attempts to capture the spread between the S&P 500 VIX Mid-Term and Short-Term Futures, based on the steepness of the VIX futures curve. The ETN takes a 100 percent long position in midterm futures while taking a 50 percent short position in short-term futures in an attempt to capitalize on the contango that's often seen with short-term VIX futures. The ETN is rebalanced daily.

2.  iPath Global Carbon ETN (NYSEArca:GRN)

GRN tracks an index of liquid-carbon-related credit plans. The problem is that this market is barely developed and 95 percent of the ETN is exposed to the emissions reduction unit (ERU), which is a type of emissions unit that represents 1 tonne of CO 2 . GRN has been trading since June 2008, but it's looking to be a race between the further development of carbon credit markets and the ETN being forced to liquidate due to low assets. It's a great idea, but GRN may have launched ahead of its time.

1.  ALPS U.S. Equity High Volatility Put Write Index Fund (NYSEArca:HVPW)

Only a few weeks old, HVPW's strategy is truly mind-boggling. The fund's strategy is to generate income by selling naked put options on 20 of the largest-capitalization stocks that exhibit the highest volatility. It sells 60-day puts at a time and distributes cash equivalent of 1.5 percent of the fund's net asset value every two months. While options on volatile stocks could generate more income, the downside risk is that HVPW is writing naked puts, so losses could be substantial if the underlying shares tank.

Ticker Fund Name Launch Date Expense Ratio (bps) AUM ($M) Underlying Index 1-Year TR Returns (%)
SPY SPDR S&P 500 1/22/1993 10 133,008 S&P 500 16.13
FLAG Forensic Accounting 1/30/2013 85 5 Del Vecchio Earnings Quality N/A
ALFA AlphaClone Alternative Alpha 5/30/2012 95 11 AlphaClone Hedge Fund Long/Short N/A
ONN Etracs Fisher-Gartman Risk On ETN 11/29/2011 85 11 The Fisher-Gartman Risk 1.33
OFF Etracs Fisher-Gartman Risk Off ETN 11/29/2011 115 12 The Fisher-Gartman Risk -7.46
NFO Guggenheim Insider Sentiment 9/21/2006 114 107 Sabrient Insider Sentiment 14.44
CSMA Credit Suisse Merger Arbitrage Liquid ETN 10/1/2010 55 72 CS Merger Arbitrage Liquid 0.62
GLDI Credit Suisse Gold Shares Covered Call ETN 1/28/2013 65 25 CS Nasdaq Gold FLOWS 103 N/A
CSD Guggenheim Spin-Off 12/15/2016 60 98 Beacon Spin-off 31.03
XVIX Etracs Daily Long-Short VIX ETN 11/30/2010 85 13 S&P 500 VIX Futures Term-Structure -23.76
GRN iPath Global Carbon ETN 6/24/2008 75 0.6 Barclays Global Carbon -58.28
HVPW ALPS U.S. Equity High Volatility Put Write 2/27/2013 95 3 NYSE Arca US Equity High Volatility Put Write N/A

At the time this article was written, the author had no positions in the securities mentioned. Contact Dennis Hudachek at dhudachek@indexuniverse.com.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: CSD , CSMA , GLD , GRN , NFO

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