ETFs in the News

IndexUniverse reported that Global X will be closing several ETFs for lack of AUM. Included in the list are the Fishing ETF (FISN) and the Farming ETF (BARN). Both fisheries (although subtle, I think this would have been a better name than fishing) and farming are themes that I have written about many times and I continue to believe are valid.

However stocks in both, as I mentioned recently in another post, are far more volatile than the underlying demand for protein. Look at the charts for the companies in the funds and you will see they are difficult to own. The combination of being difficult and unlucky timing is what hurt these funds, in my opinion. At some point the stocks within will again catch fire but obviously at that time investors will only have individual stocks to choose from.

The funds got made fun of a lot which I never fully understood. They targeted narrow niches, turned out not to catch on and so they are being closed. Investors were not hurt in any sort of unique or flawed product manner, the funds simply did poorly like any individual stock or narrow fund might.

The other bit of ETF news, also reported by IndexUniverse, is that ProShares has filed for a suite of low volatility ETFs. Broad based, low vol ETFs are being issued left and right and attracting a lot of AUM. The PowerShares S&P 500 Low Vol ETF (SPLV) has attracted $700 million in about ten minutes of trading (hyperbolic comment).

The funds in the filing are targeted to track the Nasdaq 100, Dow 30, Russell 2000, Russell 1000, MSCI EAFE, MSCI Emerging Market and the S&P Mid Cap 400. You can read the IU link for more specifics but basically the strategy will be to increase or decrease equity exposure to the respective index based on realized volatility of that index going above or below 15%.

Obviously I have no idea how well these particular funds will work but SPLV and the EG Shares Low Volatility Emerging Market Dividend ETF (HILO) have both traded as advertised in the short histories.

I think these funds, the ones that end up working as advertised, offer a chance for the core and explore concept to evolve. One aspect of portfolio construction and management for do-it-yourselfers is limited time available to spend on the task. The drawback for using regular cap weighted, broad funds is the lack of portfolio precision and absorbing every bump on the way down.

The low vol funds are obviously designed so that holders do not absorb every bump on the way down (you need to decide for yourself whether they achieve that objective). A broad based fund portfolio capturing various segments (small cap, emerging and so on) could be assembled using low vol fund with some disproportionately large chunk of the portfolio and put the smaller portion into various themes, niches or countries.

This could end up as some combo for the equity portion of four or five low vol funds for the broad portion combined with maybe five individual stocks or narrow ETFs as described above. Keeping track of ten holdings would address the time constraint issue that some folks have. Defensive action could be achieved, at least partly, by selling or reducing exposure in the narrow holdings. The remaining broad, low vol holdings would (or should) be less volatile than straight beta holdings and maybe even have a higher yield.

I am not about to switch to this approach but it can be valid way to go; broad access, some specialty exposure, the chance for more yield and no 40 hour time requirement. For some this would be a very good way to go.

About Roger Nusbaum 169 Articles

Roger Nusbaum is an Arizona-based financial advisor who builds and manages client portfolios using a mix of individual stocks and ETFs. Roger writes a popular blog, which focuses on risk management, foreign stocks, exchange traded funds, options etc.

Roger has been recognized by many in the investment management industry for his expertise in portfolio management. Roger has been regularly interviewed by the financial press, trade journals, and television news shows. He has also had numerous technical articles published and has been quoted in a number of professional trade journals, newspapers, and consumer finance magazines. He appears frequently on CNBC Asia as a market commentator.

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