The financial markets have been inundated with a flood of new and innovative ETFs vying for your investment dollars. These new funds provide interesting opportunities for those wishing to make specialty investments. However, these niche products also pose new risks for investors. (For more, check out our special feature, Exchange Traded Funds.)
In Pictures: 20 Tools For Building Up Your Portfolio
China Sector Funds
In the past, if you wanted to invest in China, you had few choices but to invest in a broad-based fund covering a wide range of Chinese companies. However, in the last couple of years financial firms have worked to introduce a number of sector-specific China ETFs. These ETFs allow investors to make more precise bets on specific sectors of the world's second-largest economy.
Currently there are China sector ETFs focused on the tech, energy, materials, industrials, consumer, infrastructure and financial sectors. Investors should be careful when considering these funds. In addition to the sovereign risk of investing in China, some of the sector ETFs also have considerable concentration within a few large firms in their sectors, and often portfolios include only about 20 to 30 names in total. However, for investors who want a very specific exposure to Chinese companies, these funds are a good choice. (For related reading, check out Investing In China.)
Lithium is a metal which is taking on increasing importance as the demand for rechargeable lithium batteries grows. Currently, lithium batteries are most popular in portable electronics, and are also used in electric vehicles like the Tesla Roadster.
It is not possible to invest in lithium directly because futures contracts on the metal do not trade on any exchange. Rather, lithium ETFs invest primarily in lithium miners and battery makers. This method is imperfect since investors are exposed to many other risks unrelated to the price of lithium. Still, if you want to invest in lithium as the commodity of the future, a lithium ETF is a good option.
While IPOs had traditionally been the bastion of highly experienced and skillful investors, a new line of IPO ETFs now allows everyone to get a piece of the action. Proponents of IPO ETFs claim that IPOs offer a chance for higher returns than the broader market. IPOs also come with significantly higher risk. Since the valuations of the stock are untested in the market, wide swings in price are common within the first few weeks of secondary market trading.
You still will not get in on the most wild price movements of the first few days though. Rather, the funds buy recent IPOs in the secondary market several days after the IPO. After making the initial investment, a stock is then held by the ETF only up to a maximum time period, possibly up to a few years, before it is sold. This means the portfolio is constantly holding relatively new stock issues.
In late 2008, Dow Jones created a new stock index, the U.S. Contrarian Opportunities Index. The Contrarian Opportunities Index is interesting because it applies an objective methodology to selecting contrarian stocks. Normally, contrarian investing relies more heavily on the judgment of a fund manager. So far, there is only one ETF tracking this new index, the JETS Contrarian Opportunities Index ETF (NYSE:JCO).
Contrarian investors believe in buying stocks which have currently fallen out of favor, but which appear to have strong fundamentals to make a turn-around at some point in the future. Typically it is thought that skilled judgment must be used to distinguish those stocks that are simply out of fashion from those that have poor business prospects. (Contrarian investors find value in the worst market conditions. Read more in our related article Buy When There's Blood In The Streets.)
Investors who believe in the technical analysis method of stock selection will be interested to find that there is a new ETF, the PowerShares DWA Technical Leaders Portfolio (NYSE:PDP). This ETF seeks to invest more than 90% of its assets in a manner replicating the Dorsey Wright Technical Leaders Index. This index is selected using a set of technical analysis indicators.
While the fund literature seems to indicate that the selection methodology focuses on relative strength, a more detailed description of the selection methodology could not be found. For investors interested in using technical analysis in their stock selection this ETF may be worthy of further investigation.
The Bottom Line
These new ETFs are great for highly skilled investors looking for a cost effective way to implement sophisticated investment strategies. However, they are specialty products that are not suitable for everyone.
Catch up on your financial news; read Water Cooler Finance: Google Gains, Taxpayers Pay.
Chart AdvisorThere has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
Chart AdvisorCopper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
Mutual Funds & ETFsLearn about the differences between Vanguard's mutual fund and ETF products, and discover which may be more appropriate for investors.
Mutual Funds & ETFsLearn about the difference between using mutual funds versus ETFs for retirement, including which investment strategies and goals are best served by each.
Mutual Funds & ETFsLearn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
Mutual Funds & ETFsDiscover the three Vanguard funds tracking the S&P 500 Index, and learn about the characteristics and historical statistics of these funds.
Forex FundamentalsDiscover the different options that are available to investors who want to obtain exposure to the Chinese yuan, including ETFs and ETNs.
Mutual Funds & ETFsLow expense ratios are a big selling point for ETFs, but are they being focused on too much?
Stock AnalysisAs a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
Chart AdvisorFalling lumber prices and weakness on the charts of home builders suggest that the next leg of the trend could be downward.
Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
Facebook, Inc. (NASDAQ: FB) went public with its initial public offering (IPO) on May 18, 2012. With a peak market capitalization ... Read Full Answer >>
Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>