The latest exchange-traded funds track some exotic indexes. By Katy Marquardt, Staff Writer January 31, 2007 The ever-expanding universe of exchange-traded funds is starting to look like an amusement-park fun house, filled with surprising -- and sometimes, scary -- sights behind every door. Consider an ETF that focuses on stocks that are popular among corporate insiders and are being upgraded by Wall Street analysts. Or one that invests in firms that hold promising patents. These oddities are creations of Claymore Securities, a Chicago-area firm. With government approval of four new funds in mid December, Claymore has expanded its roster of ETFs to nine. But the firm isn't interested in traditional benchmarks, such as Standard & Poor's 500-stock index, that served as the focal points for early ETFs. Its ETFs are tied to obscure indexes whose stocks are picked on the basis of different investment strategies (ETFs are like index funds, but they trade on exchanges like stocks). Claymore/BNY BRIC (symbol EEB) mimics a Bank of New York index that focuses on four hot emerging markets: Brazil, Russia, India and China. There's also Claymore/Zacks Sector Rotation (XRO), based on an index that shifts to emphasize hot sectors. Just approved, in addition to the patent ETF, is one that focuses on corporate spinoffs. It's difficult to decipher the funds' strategies because much of the selection criteria for the indexes is proprietary. Claymore's ETFs are sexy. "They're funky and appealing because they open up interesting strategies at a low cost," says Jim Wiandt, editor of the Journal of Indexes and publisher of IndexUniverse.com. Actually, the funds' annual expenses, which are capped at 0.60%, are high for ETFs. Advertisement Claymore says the returns of the indexes used in its ETFs are terrific. It makes that assertion based on back-testing, the art of examining how a strategy would have worked in the past. Still, prudence dictates against using the milk money to invest in these ETFs, because such narrowly focused funds are susceptible to the thrills and chills that you would expect to find in a fun house.