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There’s been an explosion of ETF offerings over the past few years, as investors have flocked to the convenience that these securities offer. It is now far easier to invest in a basket of stocks, at much lower prices, than it ever was during the height of the mutual fund era.
These ETF offerings allow managers great flexibility when it comes to designing various portfolio strategies. No longer are investors limited to the familiar asset classes as fund options. Now they can partake in highly specific, targeted ETF strategies. Some of these have gotten very exotic, while others offer intelligent strategies that can be used to tweak portfolios.
Invest With the Gurus
For example, the Global X Guru ETF (NYSEArca: GURU) takes a look at all the 13F filings for hedge funds that have $100 million or more invested in the U.S. So it looks at holdings of all the big names you’ve heard before, like Warren Buffett, David Einhorn and so on, and then pulls out the companies in which these gurus have the highest conviction.
The idea is that you don’t have to spend time wading through the holdings of all the big names in the hedge fund world. The fund does it for you. It only holds 46 stocks, but that’s about what most hedge funds hold, so you are effectively getting a fund of “the best of the best.”
Whereas you would normally pay a 2% management fee plus 20% of the profits if you were invested in a hedge fund, here you pay 1.16%. The fund has a 22% return over the past three years.
Covered Calls ETF
Here’s an ETF that handles one of my favorite market strategies: writing covered calls. The PowerShares S&P 500 BuyWrite ETF (NYSEArca: PBP) takes a look at the S&P 500, then buys certain stocks from that list. Then it sells covered calls against those stocks.
For those who aren’t familiar with the strategy, selling a covered call means selling the right for someone else to buy that stock from you at a given price on or before a given date. By selling that right, you collect a fee called a premium.
The idea is that if the stock is purchased from you, it has been purchased at a price that is at or below the execution price plus what was paid for it. That’s a good deal for the buyer. If the stock price isn’t high enough, you keep the stock and the premium.
The idea is to generate modest returns, not blow the market away.
An ETF for the Volatility-Averse Investor
Another way to go is something called the PowerShares S&P 500 Low Volatility ETF (NYSEArca: SPLV). For low-risk investors who can’t stomach big moves in their stocks, this ETF is for you. The idea here is that the fund will take the S&P 500 and then select the 100 stocks that have the lowest volatility over the preceding 12 months.
By volatility, the fund refers to stocks whose magnitude of price movements are the lowest. This strategy has proven to be very successful, by capturing 73% of the S&P 500’s up movements over time, while only succumbing to 43% of the downside. It’s the very definition of safety. The fund is concentrated mostly in financials and consumer staples, and has many familiar names.
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