It was only a matter of time before exchange traded funds turned more and more into very specific tools to accomplish diversification in very specific sectors, writes Ben Shepherd of Investing Daily.

Ten new exchange traded funds were launched last week, which is the first time in quite a while that so many ETFs have debuted at once.

Each ETF takes a unique approach toward its respective investment niche, so they all deserve a closer look. Of course, even the most compelling new ETFs must still build sufficient trading volume before they’re suitable for investors.

Market Vectors Unconventional Oil & Gas ETF (FRAK)
Many consumers have enjoyed lower heating bills this winter, but a warmer-than-average season deserves only partial credit. Rock-bottom natural gas prices have contributed substantially to reducing consumer energy expenses.

As a growing number of exploration and production companies have begun to employ innovative techniques to exploit unconventional reserves, a glut of natural gas produced from areas such as the Marcellus shale formation has depressed prices.

Despite these lower prices, there’s been a surge of interest in unconventional oil and gas plays. Now that vast amounts of US natural gas reserves have been discovered, natural gas is being discussed as a bridge fuel to wean the US from its dependence on oil and ultimately bolster its energy independence.

FRAK tracks a basket of 44 companies that generate at least 50% of their revenue from the production of unconventional oil and natural gas resources, such as oil sands, shale gas, or coal bed methane. The ETF’s portfolio includes holdings such as Occidental Petroleum Corp, Canadian Natural Resources, and EOG Resources.

Large-cap names dominate the portfolio with an 83.5% allocation. But the fund’s 15.9% allocation to mid-cap stocks offers some exposure to smaller companies.

While unconventional energy plays are a global phenomenon, the ETF’s portfolio is geographically concentrated in the US, with 71.2% of assets allocated to US companies and 28.5% to Canadian companies. The fund charges an annual expense ratio of 0.54%.

Oil and natural gas production is becoming increasingly difficult—most of the easy oil plays have been discovered and many new fields are more technologically challenging to develop due to their location. That means unconventional reserves will play a greater role in accommodating global energy demand.

As such, this is a corner of the energy market that will likely experience heavy investment and significant merger and acquisition activity in the coming years, which make this ETF particularly attractive.

First Trust Advisors launched two new funds last week that apply the firm’s proprietary AlphaDEX stock-selection methodology to global small-cap stocks.

First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS) and First Trust Developed Markets ex-US Small Cap AlphaDEX Fund (FDTS) both hold small-cap stocks that have been scored and selected based on a variety of value and growth factors. AlphaDEX is a fundamental stock selection methodology that attempts to identify stocks with the potential to generate returns above and beyond traditional index constituents.

The ex-US fund takes a global approach to portfolio construction, and currently allocates 32% to Japanese companies. South Korea is the second largest geographical allocation at 18.3% of assets, followed by Hong Kong at 7.9%. While Asia is heavily represented in the fund’s portfolio, Canada, Australia, and the United Kingdom also figure prominently in the fund’s geographical exposure.

From a sector perspective, the fund’s methodology currently favors consumer-discretionary names, which account for more than 23% of assets. Industrials account for another 18.1% of assets, followed by materials at 17.6%. The fund is relatively underweight in more defensive sectors such as utilities (1.1%) and telecoms (1.1%).

The ETF currently tracks a basket of 393 global small-cap names. The largest company has a market cap of $2.87 billion, and the smallest has a market cap of $85 million, while the median market cap of the fund’s holdings is $608 million.

The emerging markets fund applies the same stock-selection methodology to its geography, so its sector allocations are similar to the ex-US fund.

The fund also has a similar tilt toward Asia. China accounts for 28.2% of assets, and Taiwan accounts for 25.3% of assets. Altogether, Asia accounts for almost 75% of assets, with small allocations toward emerging Europe (Russia, Poland, and Turkey) and Brazil.

Given that the AlphaDEX methodology largely focuses on momentum, both funds are positioned to capitalize on continued global economic improvement. While a momentum-based methodology can suffer greatly during significant market pullbacks, it can also benefit from improving investor sentiment.

7 More from BlackRock
BlackRock also had a busy week with its launch of seven new specialty bond funds.

iShares AAA to A Rated Corporate Bond Fund (QLTA) tracks a basket of corporate bonds with ratings ranging from AAA to single-A. The fund charges a 0.15% annual expense ratio.

iShares Barclays US Treasury Bond Fund (GOVT) tracks government bonds with at least one year left to maturity, including everything from short-term to long-term bonds. That approach makes this one of the few ETFs to track almost the full spectrum of government debt. The fund charges a 0.15% annual expense ratio, which makes it one of the least expensive government bond fund ETFs available.

Two new mortgage-backed bond funds were also added to the iShares fixed-income lineup. iShares Barclays CMBS Bond Fund (CMBS) tracks commercial mortgage-backed securities, and iShares Barclays GNMA Bond Fund (GNMA) tracks residential mortgage-backed bonds issued by the Government National Mortgage Association.

The CMBS fund will only construct its portfolio from debt that is eligible for holding by pension plans, which ensures a high-quality portfolio. And GNMA bonds carry government backing in case of default. The CMBS fund charges a 0.25% annual expense ratio, while the GNMA fund charges a 0.32% annual expense ratio.

BlackRock also launched iShares Industrials Sector Bond Fund (ENGN), iShares Financials Sector Bond Fund (MONY), and iShares Utilities Sector Bond Fund (AMPS). All three funds charge annual expense ratios of 0.30%, and are the first sector-specific, investment-grade bond ETFs. These offerings allow investors to fine-tune their exposure to particular sectors, while also moving beyond duration and credit quality when building a fixed-income allocation.

Read more from Investing Daily here...

Related Reading:

3 Perfect ETFs for Yield Lovers

10 World-Class Global ETFs

Open Your Portfolio to Closed-End Funds

Related Articles
  1. Mutual Funds & ETFs

    Top Three Transportation ETFs

    These three transportation funds attract the majority of sector volume.
  2. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  3. Investing Basics

    Tops Tips for Trading ETFs

    A look at two different trading strategies for ETFs - one for investors and the other for active traders.
  4. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  5. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  6. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  7. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  8. Mutual Funds & ETFs

    Top 4 Investment Grade Corporate Bonds ETFs

    Discover detailed analysis and information about some of the top exchange-traded funds (ETFs) that offer exposure to the investment-grade corporate bond market.
  9. Insurance

    The 5 Biggest Russian Insurance Companies

    Discover the five companies that dominate the Russian insurance market, and learn a little more about their business operations and ownership.
  10. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. 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 >>
  4. 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 >>
  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. 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 >>

You May Also Like

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!