As they say, success breeds success. And that was certainly true with this week’s round of exchange traded fund (ETF) launches.
This week saw several sponsors tapping the well and reintroducing variations of successful products into their lineups. Again, most of those products continued the trend of fundamental indexing and active management.
Pacer US Small Cap Cash Cows 100 ETF
Pacer Developed Markets International Cash Cows 100 ETF
J.P. Morgan Cushing 30 MLP Index ETN
First Trust California Municipal High Income ETF
Guggenheim Multi-Factor Large Cap ETF
Pacer Focuses on Cash Flows Again
While not a big name in the ETF industry, Pacer has been winning plenty of awards and investor support for its lineup of trend-riding ETFs. A favorable subset of those funds has been its so-called cash cow suite of products, in which Pacer screens larger indexes for stocks based on their free cash flow yields. Firms that generate high free cash flows are seen as having enough money to grow dividends as well as invest in growth opportunities. There’s some academic research that suggests those firms that do this outperform rivals.
CALF will focus on U.S. small caps and screen the broad S&P 600 for the top 100 companies with the highest free cash flow yields. Likewise, ICOW will perform a similar screen on the large-cap international-stock-focused FTSE Developed ex U.S. Index. Both ETFs will then weight these stocks by the highest trailing 12-month free cash flows to create their portfolios. In essence, both ICOW and CALF allow investors to tap into the best “growth & income” stocks in their respective indexes and market segments.
Given the success of the other two Pacer cash cow products already on the market, both CALF and ICOW could see plenty of investor interest. Pacer already has $1 billion under management.
With expense ratios of 0.65% for ICOW and 0.59% for CALF, Pacer may have another pair of hits on its hands.
For a list of all Pacer ETFs, look here.
J.P. Morgan’s Déjà Vu
The JPMorgan Alerian MLP Index ETN (AMJ A-) was one of the first and largest ways for investors to tap the world of master limited partnerships (MLPs). The unfortunate thing was that AMJ proved to be too good and was swamped with investor money. J.P. Morgan had to shut down new creations for the ETN, and AMJ now trades more like a closed-end fund than an index tracker.
Sensing an opportunity as MLPs remain hot, the investment bank launched the JPMorgan Cushing 30 MLP Index ETN (PPLN n/a).
There are two big indexes in the world of MLPS. One is Alerian, which AMJ tracks. The other is the Cushing 30, which covers the 30 largest MLPs operating in the midstream energy infrastructure space – pipelines, gathering systems, storage farms, etc. The key feature of the Cushing is that the holdings are equally weighted as opposed to Alerian’s market-cap-weighting scheme. Likewise, the index uses several screens to include MLPs in the first place.
The equal-weighting can produce higher returns in strong markets and provides a bit more yield. As of April 28, 2017, the Cushing index yielded around 6.71%.
The fund itself is solid. The problem for J.P. Morgan could be the sheer number of MLP ETFs/ETNs on the market – currently 29 – and PPLN’s high expense ratio of 0.95%. However, given AMJ’s success, investors could choose to use PPLN.
For a list of all new ETF launches, take a look at our ETF Launch Center.
Factors & Munis Round out the Week
The other two big launches this week came from top second-tier ETF players Guggenheim and First Trust. Both firms have competed quite well with the big boys by offering non-traditional indexed and active products. This week the Guggenheim Multi-Factor Large Cap ETF (GMFL n/a) and First Trust California Municipal High Income ETF (FCAL n/a) add to that.
FCAL is an actively managed municipal bond ETF specializing in bonds from California. FCAL’s managers will look for those undervalued bonds relative to their current yields to try and optimize how much income its investors receive.
GMFL is a concentrated multifactor fund. The ETF screens the S&P 500 for the 50 stocks that meet certain value, growth, quality, momentum, short interest, volatility and liquidity factors. If you wanted a focused smart-beta ETF, then GFML is the fund for you. The fund’s small number of holdings and focus on factors is designed to boost returns over the long haul.
Expenses for FCAL run at 0.50%, while GMFL’s clock in at a cheap 0.25%.
The Bottom Line
This week continued the smart-beta parade of new funds by copying already successful ideas. There’s nothing wrong with that, and in the end, investors now have more tools to build-out their portfolios.
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