Exchange traded funds try to follow a specific sector, style or asset class, but some ETFs may exclude specific segments of the market they are targeting.
The exclusionary approach allows investors to stay away from what may be poor performers within a specific market, but the “ex” has not been popularly received, writes Jonathan Burton for MarketWatch.
“They really haven’t resonated with investors,” said Paul Justice, director of ETF research at investment researcher Morningstar Inc, said in the report. “Inclusionary strategies have gained the money, not exclusionary ones.”
For example, the iShares MSCI ACWI ex U.S. Materials Sector Index (NYSEArca: AXMT) , which follows global materials-related stocks sans the U.S., has only attracted $3 million in assets and trades less than 2,000 shares per day on average. Additionally, other similar sector offerings have not attracted a strong following either.
Nevertheless, providers believe some investors will find the strategies valuable.
“We provide products targeting broad and specific exposures in order to meet the needs of a diverse client base,” iShares director Rene Casis said in the article.
“There are times when investors may wish to avoid technology companies,” Ryan Issakainen, an ETF strategist at First Trust, said of the First Trust Nasdaq-100 Ex-Technology Sector Index (NYSEArca: QQXT) – the tech sector makes up two-thirds of the Nasdaq-100.
“To do the ‘exes’ suggests you know that sector or country is burdened by something that will remain so indefinitely,” Mark Luschini, chief investment strategist at Janney Montgomery Scott LLC, cautioned.
Standout “ex” ETFs include the WisdomTree Dividend ex-Financials Fund (NYSEArca: DTN) , which has attracted $1.3 billion in assets, and the iShares MSCI Pacific ex-Japan Fund (NYSEArca: EPP) , which holds $3.4 billion in assets. While the financial sector and Japanese economy have been relatively poor performers, potential investors should note that holding onto these types of funds may force them to miss out on any potential upside in the future. [ETF Spotlight: WisdomTree Dividend Fund]
“If you’re wrong, and what you’re excluding works out, you’re at a significant disadvantage,” Todd Rosenbluth, an ETF analyst at S&P Capital IQ, said.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.