The ETF industry continues to grow and evolve. Total assets in US listed ETFs now exceed $1.5 trillion (as of May 31, 2013), while the total number of products exceed 1,470. This year has been great for US equity ETFs, mainly due to the surging stock market.
Income and yield oriented ETFs were extremely popular with investors earlier this year, and a number of new products targeting this space were launched. (Read: Invest like Warren Buffett with these ETFs)
Among international markets, Japan ETFs—currency hedged Japan ETFs in particular—were among the top asset gatherers this year. Emerging markets ETFs largely fell out of favor as many of these markets underperformed the US market. (Read: Three important questions about your ETF portfolio)
While investors continue to put money into bond ETFs, it appears that they are increasingly getting concerned about the increase in interest rate. As a result short duration and other ETF strategies that provide protection against higher interest rates gathered assets during the year and saw new product launches.
Most of the ETFs launched this year follow popular investing strategies but a few target niche strategies. Below we highlight three ETFs launched recently, that in our view will reward investors nicely over the longer term. (Read: Buy these three ETFs for excellent dividend growth)
SYLD is an actively managed fund based on the research that free cash flow is a key predictor of a company’s strength. This product invests in companies that show strong characteristics in returning free cash flow to their shareholders by way of cash dividends, share repurchases, or by reducing their leverage.
While dividend stocks remain extremely popular, most investors overlook the fact that US companies have been increasingly changing their payout mix to include more buybacks. In 2011 seven out of the ten S&P 500 sectors offered a higher yield resulting from share repurchases than from cash dividend payments.
Thus by focusing only on dividends, investors tend to miss the bigger picture; they need to look at companies that return cash to shareholders in all three ways.
SYLD has a diversified portfolio of 100 stocks with market caps greater than $200 million, with a tilt towards large cap stocks that currently comprise 56% of the portfolio. Financials (20%) Consumer Discretionary (17%) and Information Technology occupy the top three spots in terms of sector exposure. Expense ratio of 0.59% looks pretty reasonable for an actively manage fund.
Most of the dividend ETFs currently available to investors focus on dividend yield or dividend growth based on past dividend growth record. On the other hand, this new product from WisdomTree has a forward-looking dividend growth focus.
Further, this product has a high exposure to technology and finance sectors that are now driving the bulk of dividend growth.
During the last five years the technology sector has accounted for more than 54% of the increase in dividends and financials have accounted for the largest increase in last three years, per WisdomTree. Further these sectors will benefit from the current sector rotation going on in the market.
The index uses both growth and quality factors, with the growth factor ranking based on long-term earnings growth expectations and the quality factor ranking based on three year historical averages for return on equity and return on assets.
The Index is dividend weighted to reflect the proportionate share of the cash dividends each component company is expected to pay in the coming year. The index has a dividend yield of 2.55% as of now.
Apple, Microsoft, P&G, Wal-Mart and Coca-Cola are the top five holdings currently. Among the sectors—the fund has highest allocation to Technology, Industrials and Consumer Discretionary sectors. It has an expense ratio of 28 basis points.
OPEC’s sixth largest and Africa’s largest oil producer Nigeria offers tremendous opportunity (though with high risk) to investors. After the banking crisis of 2009, the country’s policymakers introduced some significant reforms in financial markets that have resulted in better capitalization and profitability of banks, stable exchange rate and lower inflation.
The economy has been growing at 7% annually since then. Per IMF, the economy is expected to grow at 7.2% and 7.0% in 2013 and 2014 respectively.
Overall the resource rich country appears to be on track to maintaining sustainable growth going forward with a booming middle class and soaring domestic consumption. Further, with lower political risk now, stock market has been one of the best performers over the past year.
At the same time, with about 75% of government revenue dependent on oil receipts, economy remains vulnerable to a fall in oil prices or production. Massive corruption, crumbling infrastructure and poor governance also remain significant obstacles.
Further, investors should remember that frontier markets can be much more volatile than developed markets and they are generally suitable for aggressive portfolios only.
NGE which made its debut in April this year is now home to $3.2 million in assets, which are invested in 28 securities. Financials account for more than 41% of the holdings with Energy and Consumer Discretionary rounding out the top three sectors.
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