Market Overview

Low Volume, High Returns for These ETFs (BIB, FHC, DRW)

Despite the rapid expansion of exchange-traded products to nearly 1,500 ETFs and ETNs combined, a percentage of products continues to dominate in terms of average daily volume. Indeed, TrimTabs Investment Research reported that the largest ETFs represent 15 percent of total daily stock trading volume, an 87 percent increase from 2006.

There is good news about low-volume ETFs and it comes in two packages. First, it has become clear that liquidity concerns with many ETFs are overstated. An ETF's liquidity is determined more by the volume in its underlying components rather than the volume of the ETF itself.

Second, as recent research from TrimTabs notes, some thinly traded ETFs outperform the more heavily traded equivalents. That tells investors investors that low volume does not mean low returns and that high volume is not always associated with high returns.

There may be differing opinions on exactly what number or range of numbers constitutes "low volume," but a screen for ETFs with average daily volume of less than 50,000 and year-to-date returns of 10 percent or more turned up more than 120 offerings. Here are few worth considering.

ProShares Ultra Nasdaq Biotechnology (NASDAQ: BIB) Given that the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB), SPDR S&P Biotech ETF (NYSE: XBI) and the First Trust NYSE Arca Biotechnology Index Fund (NYSE: FBT) are among the three best-performing sector funds through this year, it is almost shocking that few traders talk about the leveraged answer to the biotech sector.

ProShares Ultra, which seeks to deliver two times the daily returns of the Nasdaq Biotechnology Index, the same index tracked by iShares, has surged more than 55 percent this year despite average daily volume of 6,580 shares.

WisdomTree Global ex-US Real Estate Fund (NYSE: DRW) The WisdomTree Global ex-US Real Estate Fund is a pleasant surprise on multiple fronts. First, the ETF has jumped 15.8 percent year-to-date and that is with exposure to some global markets that investors have been conditioned to avoid recently. WisdomTree offers exposure to a mix of developed and emerging markets. All told, 25 countries, including five Eurozone members, are represented in the ETF. So are emerging markets laggards such as Brazil, South Africa and Taiwan.

In other words, WisdomTree's performance this year is downright impressive. So is the ETF's 4.6 percent distribution yield. DRW has delivered stellar returns and a robust yield on average daily turnover of less than 19,000 shares.

Focus Morningstar Health Care Index ETF (NYSE: FHC) The Focus Morningstar Health Care Indsex ETF is basically the FocusShares answer to the larger, more heavily traded Health Select Sector SPDR (NYSE: XLV). Not only is Morningstar the dominant health care ETF in terms of size, it is also the cheapest with an expense ratio of 0.18 percent. That said, it must be noted that Morningstar only charges 0.19 percent and has outperformed XLV by almost 80 basis points, rendering the expense ratio conversation a moot point.

Morningstar is a prime example of what the TrimTabs research highlights: A low-volume ETF that does not necessarily suffer from liquidity problems because its underlying components are heavily traded.

Johnson & Johnson (NYSE: JNJ), Pfizer (NYSE: PFE), Merck (NYSE: MRK) and Abbott Labs (NYSE: ABT) combine for about 35 percent of Morningstar's weight. Those are all heavily traded stocks and the flight to those and other blue-chip pharmaceuticals names has helped Morningstar gain almost 10.7 percent year-to-date despite average daily volume of less than 2,800 shares.

For more on ETFs and liquidity, click here.

Posted-In: Long Ideas News Sector ETFs Short Ideas Specialty ETFs Pre-Market Outlook Markets Trading Ideas Best of Benzinga

 

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