The major sponsors of exchange-traded funds have billions of dollars in assets, and most people regularly hear about their latest fund offerings.
At the other end of the market are these ETFs, which (as of today) are the sole offerings of their sponsors. Many, if not all, of these sponsors are planning additional ETF products.
Should advisors consider a standalone ETF for clients?
On the plus side, to launch a single ETF, a sponsor needs an idea that isn’t a clone of something already on the market. That doesn’t mean it will be the best investment strategy ever devised, but at least it won’t be an idea that everyone has already seen a dozen times.
And, for those who have questions about the product, there is a good chance that the sponsor will get back to them rather quickly. Companies new to the ETF industry need business and usually are willing to work hard to get it.
Of course, there are negatives associated with smaller ETFs. A new product may have more limited liquidity, meaning that it will trade with wider spreads, so investors may want to buy or sell with limit orders.
And there are no guarantees of success in the ETF world. If it doesn’t attract enough assets, an ETF -- even one from a big sponsor -- may close its doors.
If that happens, the underlying assets are liquidated and the cash distributed to holders of the defunct ETF. That can produce a gain or loss or what the Internal Revenue Service calls a “taxable event.”
Here are four standalone ETFs to consider.
1. Calamos Focus Growth ETF (CFGE) is an actively managed portfolio of blue-chip U.S. growth stocks. The ETF is a compact portfolio of large-capitalization issues. The strategy is similar to that used in CBCAX, a traditional mutual fund from Calamos Investments. CFGE was launched on July 14, 2014.
2. Diamond Hill Valuation-Weighted 500 ETF (DHVW) came public as an ETF on May 12. Before that, it was a private fund established in December 2011. The ETF is based on a proprietary index that uses discounted cash flow to rank 500 large companies by their intrinsic value capitalization.
3. Tortoise North American Pipeline Fund (TPYP) is an ETF that provides access to the performance of pipeline corporations and master limited partnerships in a tax-efficient manner. The fund’s structure avoids K-1s and issues 1099 forms to holders. TPYP launched on June 30.
4. Validea Market Legends ETF (VALX) is an actively managed portfolio that seeks to benefit from the published strategies of investment gurus Warren E. Buffett, Benjamin Graham and others. Validea Capital Management runs 17 different models and selects 100 stocks from 10 of them, representing a variety of investment styles.
Joseph Lisanti, a Financial Planning contributing writer in New York, is a former editor-in-chief of Standard & Poor’s weekly investment advisory newsletter, The Outlook.
This story is part of a 30-30 series on smart ETF strategies. It was originally published on Aug. 10, 2015.
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