Exchange traded funds (ETFs) are allowing investors to experiment with strategies that were once exclusive to professional portfolio and hedge fund managers. However, rather than paying the typical two and twenty fee structure associated with many hedge funds, regular investors can implement similar strategies at a much lower cost. While active management certainly carries numerous advantages, often justifying the high fees, those who cannot meet the minimum capital requirements should consider the following alternatives.

IN PICTURES: 20 Tools For Building Up Your Portfolio

Mergers and Acquisitions
The IQ ARB Merger Arbitrage ETF (NYSE:MNA) mimics the ARB Merger Arbitrage Index. Merger arbitrage involves purchasing the shares of the target company while simultaneously shorting those of the acquirer in a merger deal. If the deal goes through, shareholders of the target will receive a premium, usually around 20-35%, while the acquirer will experience dilution and a subsequent share price decrease. MNA mimics the ARB Merger Arbitrage Index which takes a long position in target companies after a major announcement has been made, and shorts the general index rather than the acquirer.

This week, for example, the fund has purchased over 52,000 shares of Arrow Energy which is in negotiations with Shell (NYSE:RDS.A) and is selling shares of Smith International (NYSE:SII) - its largest equity holding at 14.16% - which has recently been acquired by Schlumberger Limited (NYSE:SLB). Although not a typical merger arbitrage fund, MNA carries an expense ratio of only 0.75% and sets a precedent for future quantitative ETFs.

Technical Analysis
The PowerShares DWA Technical Leaders ETF (NYSE: PDP) tracks the performance of the Dorsey Wright Technical Leaders Index, investing in 100 securities, including options, which show powerful relative strength indicators. Rather than performing personal technical analysis, PDP reflects the research of experienced investment professionals. A 0.69% gross expense ratio allows investors to participate in the ETF, saving on the costs of investing in a pure technical fund.

The top holdings of this instrument include American Tower Corp (NYSE:AMT) and Apple (Nasdaq:AAPL), which continue to sore to new highs and definitely provide momentum for the ETF. The major advantage of PDP is that Dorsey Wright analyzes 3,000 companies, saving investors the agony of filtering through thousands of stock charts.

Dynamic ETFs
The Intellidex Methodology assesses corporate sectors and equities based on fundamentals, valuation, timeliness and risk. Filters and investment rankings, among other factors, are implemented to create optimal intellidexes based on desired market exposure, market cap and style criteria. The Powershares Dynamic Market Portfolio ETF (NYSE:PWC) tracks the Dynamic Market Intellidex Index which is created using the aforementioned strategy. Forbes classified such investment tools as "ETFs with Brains".

Similar to the other actively managed ETFs, PWC carries an expense ratio of 0.60%. These actively managed ETFs are more expensive to hold than some of the traditional broad market and index oriented instruments due to the high level of involvement required by management. Nonetheless, they are still cheaper than investing directly with an investment fund.

Bottom Line
Actively managed ETFs, especially MNA, are subject to a high level of scrutiny and criticism and do not yet compose a large portion of the available funds that are available to investors. The volume on these tools does not yet compare to that associated with larger, more common products such as the MSCI Emerging Markets Index ETF (NYSE:EEM). However, MNA, PDP and PWC reveal the creative additions that investors can make to their portfolios at a relatively cheap price. (To take full advantage of these vehicles, you need to know how they can fulfill certain strategies. To learn more, see How To Use ETFs In Your Portfolio.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: First Trust Dorsey Wright Focus 5

    Take a closer look at the First Trust Dorsey Wright Focus 5 ETF, a unique and innovative fund of funds based on momentum and relative strength.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares National AMT-Free Muni Bond

    Take an in-depth look at the iShares National AMT-Free Municipal Bond ETF, a highly diverse and very popular muni bond fund.
  3. Mutual Funds & ETFs

    Top 3 Switzerland ETFs

    Explore detailed analysis and information of the top three Swiss exchange-traded funds that offer exposure to the Swiss equities market.
  4. Mutual Funds & ETFs

    7 Best ETF Trading Strategies for Beginners

    Exchange-traded funds are ideal instruments for beginning traders and investors. Learn the seven best strategies for trading ETFs.
  5. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  6. Trading Strategies

    Who Actually Trades or Invests In Penny Stocks?

    Although penny stocks are highly speculative, millions of people trade them daily. Here are 10 different types who do.
  7. Chart Advisor

    4 Stocks Still Flashing Buy Signals

    In the midst of volatility and a big market sell-off last week, these stocks are flashing buy signals.
  8. Mutual Funds & ETFs

    ETF Analysis: SPDR Dow Jones International RelEst

    Learn how the SPDR Dow Jones International Real Estate exchange-traded fund (ETF) is managed and for whom the ETF is most appropriate.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares JPMorgan USD Emerg Markets Bond

    Learn about the iShares JPMorgan USD Emerging Markets Bond fund, which invests in bonds of sovereign and quasi-sovereign entities from emerging markets.
  10. Active Trading Fundamentals

    How Hedge Funds Front-Run Index Funds to Profit

    Understand what front running is, and learn how hedge funds use this investing strategy to profit from the anticipated stock buys of index funds.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth ...
  4. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment ...
  5. Systematic Manager

    A manager who adjusts a portfolio’s long and short-term positions ...
  6. Unconstrained Investing

    An investment style that does not require a fund or portfolio ...
RELATED FAQS
  1. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!