3 New Innovative ETFs

06/17/2013 8:30 am EST

Focus: ETFs

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

ETF expert Doug Fabian discusses three of his favorite new innovative plays, and explains why investors should take a look at them.

ETFs made easy. We're here now with Doug Fabian. Doug, there are some innovations in the world of exchange-traded funds.

Well, Ray, I love this area of ETFs. And in some sense it's getting really complicated, because there are 1,300 products, but there's really good stuff that's coming from American companies; there's innovation that I want investors to know about.

The first innovation that I want them to know about is an ETF that is actually a fund of funds...an ETF of ETFs. Now, you might initially think that maybe somebody's going to get double-charged or something like that. That's not the case. If you have mutual funds inside a mutual fund, there is a compounding of fees, but not so in the world of exchange traded funds when it's done by a single company.

In this case, it's iShares. They came out with a product called iYield (IYLD). It has put together ten income ETFs. This exchange traded fund has got a current yield of 5.4%. You're receiving that income monthly, so it's a very nice tool for income investors.

It is a blend of dividend stocks, preferred stocks—not just banking—and real estate investment trusts, which make up about 50% equities of those three categories. Then on the fixed-income side, they've got some high-yield bonds, they've got some Treasury bonds to offset the risk of the high-yield bonds, and then they've got plain old corporate bonds.

This blended approach makes it very easy for an income investor to have a decent sized position in one security that doesn't have a lot of volatility and delivers income to them each and every month.

Talk some more about hedged equity.

Well, that sounds complicated, and I certainly am thankful that somebody knows how to do this, but there are now ETFs whereby the distributor, in this case Wisdom Tree, is taking out the currency risk out of an investment.

Let's talk Japanese stocks for a moment. I think most investors realize the Japanese stock market has been going up, but one of the reasons why it's going up is because its currency has gone down. The currency has fallen 30%...that's a huge, huge depreciation in the currency. You have currency risk when you own Japanese equities.

What Wisdom Tree has done is hedged (with DXJ), and they use futures and options to do this, so they're taking the currency risk out of the ownership of Japanese stocks, and it's resulted in a banner situation for investors. This particular exchange traded fund is up 40% in five months versus a pure basket of Japanese equities that's up more like 25%. So you're getting a 15% increase over Japanese equities because they're taking away currency risk. That's innovation.

One of your buzz phrases these days is "industry-level ETFs." Talk about that.

Well, again, I'm loving what the industry is doing. Again, in some cases, people are overwhelmed just with the choices. But let's think about investment themes.

One of the themes I really like is in the world of energy services. Now, you can invest into the exchange traded fund that takes energy services, which encompasses everything from oil rigs to offshore drilling...you can now just own those companies that are focused on the technology of fracking, of extracting oil and natural gas through that fracking technology process.

I don't know all the ins and outs of how it works, and the great thing about being an investor is you don't need to know, either. You just need to know that this is happening, this is a way to be able to increase production for these companies.

They're booming in their businesses, and now you can get exposure to fracking stocks in one ETF that has 40 individual equities in it (FRAK), to give you some diversification, on a specific idea, technology, and trend.

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