The exchange traded funds industry continues to launch new products, and contrary to what typically happens with mutual funds, investors are willing to put money into these new funds within the first three years. More than 30 percent of the 1,400 equity and fixed income ETFs rated by CFRA came to market since June 2015, many with greater than $250 million in assets.
We don't believe investors are waiting for an ETF to hit a magic three-year anniversary, nor should they. Since most ETFs are index-based and reveal what’s inside on a daily basis, investors can make informed decisions whether an ETF is a complement to their existing portfolio. CFRA’s equity ETF ratings incorporate valuation and risk consideration analysis at the holdings level, while bond ETF ratings incorporate credit quality, duration and yield. Both approaches also add in fund-specific attributes, such as technical trends and costs. We typically begin coverage three months into an ETF’s history.
Below we look at some of our favored and still young ETFs. Many of these were also highlighted during the two-day Inside ETFs Smart Beta and Active Summit in NYC last week. CFRA Research spoke during multiple due diligence panels about the importance of looking inside a fund..
With $3.3 billion in assets, Goldman Sachs ActiveBeta US Large Cap Equity ETF (GSLC) will turn 3 years old in September 2018 and is one of the most successful ETF launches. The ETF is constructed based on four established factors: low volatility, momentum, quality and value.
GSLC holds many stocks that are viewed favorably to CFRA based on STARS, our qualitative valuation approach and using S&P Global Market Intelligence with a risk-focused review of the earnings and dividend records. Holdings include Apple, JPMorgan Chase, Johnson & Johnson and Home Depot. CFRA also likes GSLC’s 0.09 percent expense ratio, tight bid/ask spread and bullish technical trends.
The firm also offers Goldman Sachs TreasuryAccess 0-1 Year ETF (GBIL), a $1.1 billion short-term bond ETF that will turn two years old in September. CFRA views GBIL’s 1.7 percent 30-day SEC yield compelling, given the strong credit ratings and 0.4 years of duration. The ETF has a modest 0.12 percent expense ratio and trades with a tight spread.
Goldman is not the only relatively new entrant into the ETF market to have success. Legg Mason Low Volatility High Dividend ETF (LVHD), launched at the end of 2015, has approximately $600 million in assets. While single-factor ETFs focused on low volatility and single-factor ETFs focused on dividends have long been popular, LVHD is one of the few that combines these two fundamental attributes. The stocks inside incur less risk, according to CFRA, as might be expected given the investment criteria. Also, many of the names are attractively valued. These include Duke Energy, Intel and McDonald's.
We also think LVHD has a modest 0.29 percent expense ratio and trades with bullish technical trends, although its trading spreads are wider than other ETFs highlighted in this piece.
Another appealing but new ETF is IQ Chaikin US Large Cap ETF (CLRG). CLRG is less than a year old and yet it already has $300 million in assets. CLRG is constructed based on a combination of value, growth, technical and sentiment attributes. Many of these are attractive to CFRA, including Anthem, Archer Daniels Midland, Bank of New York Mellon and Valero Energy. CFRA also views favorably the fund’s 0.25 percent net expense ratio.
Meanwhile, Invesco S&P 500 Enhanced Value Portfolio (SPVU) is an example of a strong offering from a well-established ETF provider, but with limited demand. Despite being set to turn 3 years old in October, SPVU has just $25 million in assets. CFRA views holdings such as Bank of America, CVS Health, Ford Motor and Walmart as undervalued. Further supporting our top rating is the ETF’s 0.13 percent expense ratio.
Another largely unfollowed, yet strong offering to CFRA is iShares Fallen Angels USD Bond ETF (FALN). The iShares ETF has a similar approach as the $1.1 billion VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL), focusing on bonds that had lost their previous investment-grade credit status. Despite a 10 basis-point-lower expense ratio than ANGL, FALN has just $65 million in assets. The ETF’s technical trends and liquidity attributes are also favorable.
While many of the recently launched ETFs are compelling to CFRA and warrant greater scrutiny, there are also various young ETFs that rate poorly.
For example, First Trust NASDAQ CyberSecurity (CIBR) and ETFMG Prime Mobil Payments ETF (IPAY) were both successful launches in July 2015, gathering a combined $1 billion in assets. However, CFRA views the stocks inside these thematic ETFs to be expensive. In addition, relative to equity ETF alternatives, the 0.60 percent and 0.80 percent expense ratios for, CIBR and IPAY, respectively, are not compelling.
CFRA’s quantitative ETF ratings are refreshed daily to ensure we provide our clients with the latest views of the holdings, costs and more. As such, ratings can shift up and down.
Reports can be found on MarketScope Advisor, which has been named a finalist for the 2018 Wealth Management Industry Awards.
Todd Rosenbluth is the director of ETF and mutual fund research at CFRA. Learn more about CFRA's ETF research here.
