In the 21 years since the SPDR S&P 500 ETF debuted, the exchange-traded fund market has mutated and grown like some sort of monster that's all-knowing and great at making analogies.
The most popular ETFs still track major global indexes, but with more than 1,600 ETFs available for purchase in the U.S., one of the daunting issues investors face is one of quantity: Just because there's an ETF for something doesn't mean you should buy it, according to Robert Goldsborough, a Morningstar fund analyst.
That said, there are more (and more) half-interesting/half head-scratching ideas out there. CNBC asked experts to weigh in on the lunatic fringe on the ETF landscape and what appeal, if any, these niche portfolios might hold for investors. You can weigh in below as well. Pull no punches!
Direxion's iBillionaire Index ETF is barely five weeks old and holds only $35 million in assets, but it's generated buzz by investing in 30 companies chosen from the portfolios of asset managers with personal net worth of $1 billion or more. If Warren Buffett has taken to gambling on college football games in Vegas, maybe this "Buffett and his buddies ETF" is a risk worth taking.
It's not the first ETF to try and tap the market's brain trust, but it's the cheapest in a crowded billionaire bunch. Goldsborough compared IBLN's 65-basis-point management fee to the Global X Guru ETF and AlphaClone Alternative Alpha fund, which come in at 75 and 95 points, respectively. "None of them are cheap," he said. "They'll say they have to roll up these stocks, but that's not so hard—a monkey could do it."
Todd Rosenbluth, S&P Capital IQ's director of ETF and mutual fund research, said a big issue with these ETFs is how to fit them into an existing portfolio. "What it holds can change significantly once it rebalances," he said. "One of the good things about ETFs is their transparency. It's a hallmark of these investments, and this particular ETF doesn't fit that."
What makes IBLN unique does not necessarily make it better, either. "It's a sexy idea, but there are a couple challenges here," said ETF analyst Spencer Bogart of ETF.com.
First, there's no reason to assume that a billionaire's largest holdings are where they generate most of their investment profits. It's possible, if not highly likely, that many of these positions are established with capital preservation and conservatism in mind. Second, there's a data lag because this information is compiled from 13F filings, which are only disclosed quarterly—in other words, after all the last quarter's buying and selling has already been completed. And in some cases, when billionaire investors are acquiring massive multiple-quarter stakes in companies, they are granted exemptions from the Securities and Exchange Commission from including those bets in the most recent 13F.
Another thing to note about IBLN is that it tilts toward growth stocks and technology names, and that has made it significantly more volatile than the S&P 500 but has failed to boost returns, Bogart said. Since inception on Aug. 1, IBLN has returned 4.2 percent.
The Merk Gold Trust launched May 16 and has earned a 1.69 percent cumulative return in that time. It tracks the metal's spot price, minus expenses, using gold held in London. This ETF's hook is that investors can opt to redeem shares for actual gold.
It's a nice idea, but it also leads to an obvious question: "A critic would aptly note that if you want physical gold, go buy physical gold," Bogart said.
The ETF's fees make redeeming less than 40 ounces impractical, and Bogart said that the decade-old SPDR Gold Trust and BlackRock's iShares Gold Trust offer superior liquidity while still investing in physically-backed gold. IAU has the added advantage of charging a management fee of 25 basis points, compared to a 40-basis-point annual fee for both OUNZ and GLD.
"It's fairly new, and people are talking about it because it's unique," said Morningstar's Goldsborough. "But you need to ask if it's really important to redeem the commodity in this way."
With the rise of electric-powered vehicles and Tesla's announcement that it's building a 5 million-square-foot factory in Nevada, the lithium used in the production of batteries might seem like a good investment. The Global X Lithium ETF, which tracks a market-cap-weighted index of global lithium producers, thus holds some appeal, but experts urge caution.
"It's a very, very narrow slice of the market," Goldsborough warned, speaking to the ETF's lack of liquidity and volatility. "An investor would need an incredibly strong level of commitment to that industry and would [still] need to make it a small portion of their portfolio." He added that the broad U.S. market has outperformed LIT over the past three years. The fund is up 5.17 percent year-to-date—compared to a year-to-date return of more than 8 percent in the S&P 500 and 12 percent in the Nasdaq 100. LIT has gathered $59 million in assets.
Bogart warned that LIT's 22-stock portfolio defines the lithium market generously. "It takes an interesting approach to capturing the lithium theme by investing in a range of companies, from household-electronics producers to chemicals companies," he said.
It's also worth noting that, in aggregate, LIT's portfolio companies are losing money, not making it, according to an ETF.com analysis. Bogart said that for an ETF that only features 22 stocks, there are quite a few that are losing money, and that is evident in a price-to-earnings ratio that ETF.com calculates to be at -5,119—yes, that's a negative before the 5,119.
While Global X lists a P/E of 21 on its website, Bogart said fund managers often toss out negative earnings entirely or cap negative earnings at a certain value and use that capped amount when calculating P/E. The reason that issuers do this is 1) it often makes their funds look more attractive and 2) because a negative P/E ratio is counterintuitive and completely lost on most investors. Either way, tossing them out or capping them distorts the real P/E picture, the ETF.com analyst said.
Global X declined to comment, but it's worth looking at the counter-argument: While the P/E ratio is eye-popping, it should be taken with a grain of salt. As in many immature industries, it is expected companies will lose money in their early history. One example: Tesla.
Behind the recent spate of Atlantic City casino closings is the rise of gambling, both in casinos and online, across many other U.S. states anxious for the added revenue. But for couch potato gamblers who prefer to place bets without venturing to the track or casino and without having to actually know how to gamble, Market Vectors Gaming ETF may be the answer. It tracks an index of 46 global gaming companies. The fund launched in 2008 and is the only one of its kind, but it has only $52 million under management.
It's a good way for someone seeking exposure to the gaming industry to get it, Goldsborough said. However, he said BJK's expense ratio, at 65 basis points, is "a bit high."
BJK is really a gamble on consumer spending, and as such, it is relatively uncorrelated to the consumer discretionary sector, Bogart said. Nevertheless, he said, it is much more volatile than broad consumer discretionary ETFs. The other thing to note is that because BJK holds big positions in companies including Las Vegas Sands, MGM Resorts and Wynn Resorts, investors might dismiss this as the "Las Vegas ETF." But, in fact, 64 percent of BJK's assets are invested in Asia-Pacific countries, where the big gaming players have been focusing their new investments.
Year-to-date, BJK has not been a good gamble. It has returned -16 percent year-to-date through Sept. 16, compared to a -1 percent return for the iShares S&P Global Consumer Discretionary ETF.
The market's sole social media ETF launched in 2011. The Global X Social Media Index ETF tracks an index of 30 companies in the social media space and currently has $145 million in assets.
"I'm surprised that there aren't more of these," Goldsborough said. "It offers reasonable fees (65 basis points), and you get foreign exposure." Lots of foreign exposure, in fact. Only half the companies SOCL invests in are U.S.-domiciled. But this ETF isn't all kitten pictures and smiling selfies. Its year-to-date performance through Sept. 16 was -5 percent. Investors would have been better off with a single-stock bet on Facebook—up 38 percent this year—or even with LinkedIn's -3 percent return, though it has fared better than Twitter, down 20 percent this year.
One big difference between SOCL and most ETFs is the way it picks stocks for the portfolio.
Investors should be aware that SOCL uses a committee-based approach to select its portfolio companies, as opposed to the rules-based methodologies that dominate most of the ETF industry. "[This] approach isn't necessarily a bad thing; it reflects the challenges of identifying what exactly a social media company is," Bogart said. However, it does mean that investors are counting on the committee to successfully identify the companies that fit with their own view of social media.
"Take a look at the fund's holdings. ... Some, like Facebook and Twitter, are definitely social media companies," Bogart said, adding, "But what about Nutrisystem or ? I don't see them as social media. "
Though almost 2 billion people worldwide use smartphones, First Trust's NASDAQ CEA Smartphone Index Fund is the only ETF to track the market. FONE has a pitiful $11.6 million under management but has rung in solid year-to-date performance of 15 percent through Sept. 16 and one-year performance of 31.71 percent as of the end of August. Like SOCL, FONE uses a committee-based approach to identify companies involved in the smartphone industry.
"It's doing well but hasn't garnered any assets," said S&P Capital IQ's Rosenbluth. "It has zero net inflows for the year. Funds this small tend to close, because there isn't enough demand."
Goldsborough unkindly compared the ETF's focus to a marketing gimmick. "At 70 basis points, this isn't cheap. You can gain similar exposure with a broad technology sector ETF, at a lower price."
And yet, FONE has turned in the best performance of any ETF in this oddball bunch.
—By Joe D'Allegro, special to CNBC.com