a little info...............
ETFZone.com
Small ETF Provider Carves Out Niche
Sunday June 4, 1:08 am ET
By Will McClatchy, ETFzone Editor
First Trust is carving out a niche as a provider of ETFs with more "punch" in selected markets. Recent introductions focus on high dividend yield and variations of the NASDAQ, and it plans three more ETFs for late June.
"We look for indices that are more strategic in nature, that allow stocks in the index to be more targeted," said Roger Starr, ETF specialist at First Trust Portfolios, known mostly in indexing as a provider of Unit Investment Trusts. "They will hopefully provide more alpha in the portfolio." This is done with quantitative screening not found in typical broad-based ETFs.
First Trust Morningstar Dividend Leaders (AMEX:FDL - News), FT NASDAQ-100 Equal weighted (NASDAQ:QQEW - News), and FT NASDAQ-100 Technology (NASDAQ:QTEC - News) have recently been launched. Soon to come are a biotech, Internet and modified S&P 500 ETF.
FDL takes a straightforward approach with a focus on high dividend yields. "Ours is a little more income, high-yield focused and a little bit less appreciation focused," he said. Most investors use dividend funds to capture high yields as a replacement for bonds. So why not maximize the key attraction of dividend yield plain and simple?
QQEW applies the well-understood principle of equal weighting to NASDAQ. Whereas the NASDAQ 100 (AMEX:QQQQ - News) weights by market capitalization, QQEW weights all 100 firms equally so that small firms occupy a much bigger role than they would otherwise. Small firms tend to be more volatile and to return more on average, so QQEW is appropriate for a very long time horizon or for a medium-term timing play at the start of an economic boom.
"In the short run it will be more volatile, but in the long run it will deliver more alpha," if history is a guide, said Starr.
QTEC is the pure-technology version of QQQQ. Many investors mistakenly use QQQQ as a kind of technology sector fund. There are actually only 42 technology firms, and QTEC captures them alone. It goes without saying that this is a risky fund and should be used with care for long-term investors as a modest portion of a long-term portfolio.
Both QQEW and QTEC are well-suited for hedging and speculative trading, since they distill what is most unique about the NASDAQ: its small high-growth and technology firms. Large swings can pay off handsomely and easily overcome trading costs.
A myriad of trades with varying levels of risk, from quite low to high, can be constructed with the two new ETFs and with the ubiquitous QQQQ. For instance, a hedge fund manager thinking that tech will rebound compared to other stocks but not confident about predicting a broad market direction could short the QQQQ and go long on the QTEC. The risk of market direction would disappear, leaving only the relative strength of tech vs. non-tech. Much more intricate options trades using collars, straddles and other techniques can be made. With hedge funds proliferating, these ETFs will surely attract interest from sophisticated professional traders.
Unit investment trusts, where First Trust has cut its teeth in indexing, is a fixed basket of stocks (not an evolving index) held for a predetermined time. It's a crude but efficient kind of ETF which invites analysis. First Trust expects to launch a biotechnology, Internet and enhanced value ETF in late June.
First Trust's campaign joins that of other smaller providers and helps put to rest notions that a few super-providers with one-stop shopping for generic styles and sectors will crowd out all other players. Smaller providers seem to be finding plenty of intriguing ways to add zip to generic indexes.
Co-founder of indexfunds.com, author of two books on investing, and founder of ETFzone.com. Will has been writing on indexing issues for 8 years. He holds an MBA from the University of Texas at Austin.
