Bloomberg News

Diamonds and Kazakhs and Bitcoins, Oh My: An ETF Parade

July 12, 2013

Bodacious ETFs

A movie poster for ``Borat: Cultural Learnings of America for Make Benefit Glorious Nation of Kazakhstan.'' Photograph by J B Reed/Bloomberg

There are 982 exchange-traded funds waiting to be approved by the Securities and Exchange Commission, according to Index Universe. In other words, there are nearly as many ETFs in registration as there are in existence. The good news for investors who shudder at the thought of yet more ETFs to sort through: only some of these will become reality.

The bulk of these filings are plain-vanilla ‘me-too’ products. Others, such as the Guggenheim Small-Mid Cap BRIC ETF, offer a slight variation on products currently on the market. Then there are a few that stand out like peacocks in a flock of crows. Here are some of the more intriguing ETFs awaiting SEC approval, along with ticker suggestions from yours truly.

1. Winklevoss Bitcoin ETF

The Winklevoss Twins propose to create an ETF that tracks the bitcoin, the crypto-currency, the same way that the SPDR Gold Trust (GLD) tracks gold. There has never been a more highly publicized ETF launch. The reason for the buzz are the three forces of nature coming together: the bitcoin, the ETF and the Winklevoss Twins.

Unfortunately for the Winklevii, most of those articles panned the filing, citing the dozens of risks outlined in 18 pages of the prospectus, such as possibility of government regulation, security concerns and the twin's lack of experience managing a trust.

Ticker possibilities: WINK, COIN, WTF

2. IndexIQ Physical Diamond Trust

This ETF would store diamonds in a small vault in Antwerp, Belgium, similar to the way gold is stored in a very large vault in London for GLD. There’s nothing like this fund on the market. The closest thing out there is the PureFunds Diamond/Gemstone ETF (GEMS), which tracks companies involved in the diamond business.

The biggest question here: How to value diamonds and make a net asset value investors can believe in? If the ETF can answer that question and establish a logical system, it could be attractive to commodity investors looking for an alternative to gold.

Ticker possibilities: ROCK, IDO

3. LocalShares Nashville ETF

Taylor Swift may be one potential investor in this ‘Music City ETF,’ which will track publicly traded companies that have corporate headquarters in the Nashville area, such as Dollar General (DG) and Cracker Barrel (CBRL). While this would be the first ETF ever to focus on a specific city, there were two state-focused ETFs back in 2009 that ended up closing up shop. The Texas Large Companies ETF (TXF) and the Oklahoma ETF (OOK) both opened and closed within a year for failing to attract assets.

Ticker possibilities: NASH, YALL

4. iShares Human Rights Index Fund

This ETF would start with the MSCI All Country World Index and then exclude countries associated with “widespread death, torture, rape, forced labor and forced displacement from communities.” While the name is catchy there are logical questions as to how this will benefit investors if a few stocks from Sudan or Iran are excluded from an index of 9,000 equities.

No socially responsible ETF has hit the big time yet. The most successful one thus far is the iShares MSCI KLD 400 Social ETF (DSI), which aims to invest in U.S. companies with positive environmental, social and governance characteristics. It has attracted $220 million in assets in seven years. However, iShares has the resources and marketing muscle to give this one the best fighting chance. That is, if it ever launches.

Ticker possibilities: HMAN, CARE

5. ProShares CDS Long North America HY Credit ETF

Many investors still cringe when they hear the words “credit-default swap,” which is why this ETF sticks out from the crowd. A credit-default swap, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, is a contract that pays the buyer face value if a bond issuer fails to meet its obligations, less what the now-defaulted debt is worth in the markets. There are eight CDS ETFs in this filing that would allow investors, for the first time ever, to bet on or against the credit quality of investment grade or high-yield issuers in North America and Europe.

Ticker Possibility: SWAP, UHOH

6. KraneShares CSI China Five Year Plan ETF

The People’s Republic of China has a series of social and economic initiatives called “five year plans” in which certain growth targets are set. This ETF looks to identify those companies that will benefit from Chinese government support as these five-year plans are enacted. For example, one recent plan for solar power development calls for adding 10,000 megawatts of solar power plants, which will benefit Chinese solar companies.

Ticker possibilities: PLAN, XIE

7. Global X Kazakhstan ETF

An ETF for the country made famous by Sasha Baron Cohen’s comic creation Borat could be a very nice investment vehicle -- Kazakhstan’s oil reserves rank tenth in the world, ahead of Nigeria and Qatar. In addition, the MSCI Kazakhstan Index is up 136 percent since November 2005. Global X has filed for many other unique single-country ETFs including Morocco, Slovakia, Qatar, Bangladesh, Sri Lanka, Pakistan and Hungary. Someday these may all make a lot of sense. The question is whether there's enough liquidity and/or investors for these markets.

Ticker possibilities: KAZ, KSTAN, NIICE

8. AdvisorShares TreesDale Rising Rates ETF

Doesn’t an ETF that benefits from rising rates sound good right now? It does, but good luck getting comfortable with how this thing works. It will invest in “agency interest-only mortgage-backed securities, interest-only swaps and certain other mortgage-related derivative instruments, while maintaining a negative portfolio duration with a generally positive current yield by investing in U.S. Treasury obligations and other liquid rate instruments.”

Okay then. Basically the fund managers want to create a portfolio where the risk of rising interest rates is effectively canceled out, while still getting the positive yield from the longer-dated bonds in the portfolio. Duration, by the way, is a gauge of a securities' price sensitivity to rate moves. If you're having trouble sleeping or hankering for penance, the prospectus is at www.sec.gov.

Ticker possibilities: RISE, BENB, NOQE

9. Direxion Water Bull 3x Shares

Have you ever been so bullish on water you just couldn’t stand it? Didn't think so. But someday you may be, and on that day you may be able to go three times long (or short) water companies, which include pump and filter manufacturers, water utilities and irrigation equipment companies. In a future of too many people and too little water, this ETF could catch on, but right now there may not be the demand for a leveraged play on water. Even the most popular Water ETF on the market, the PowerShares Water Resources Portfolio (PHO), trades just 114,000 shares a day.

Ticker possibilities: DRNK, GLUG

10. Global X Top Activist Investor Holdings

After the recent much-publicized battle between Carl Icahn and Bill Ackman over Herbalife stock -- which is up 49 percent this year -- investors may respond well to this ETF. It will track an index comprised of the top U.S. listed equity positions held by a select group of the world’s premier activist investors. This ETF looks to be a kissing cousin to the Global X Top Holdings Guru ETF (GURU), which tracks hedge fund managers' 13F filings and is up 48 percent in the past year.

Ticker possibilities: PEST, ACTV, CARL

Eric Balchunas is an exchange-traded-fund analyst at Bloomberg. More ETF data is available here, and weekly ETF podcasts can be found here.


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