New ETFs for Offbeat Niches

You can now buy ag stocks and bet against junk bonds through exchange-traded funds.

Editor's Note: This story has been updated since its original publication in the June issue of Kiplinger's Personal Finance magazine.

The barest whiff of an investment opportunity seems to result almost instantly in the birth of a new exchange-traded fund. We found four interesting ETFs, three of which were launched recently and one that is poised to launch soon.

Food prices around the globe are expected to continue to rise through the first half of this century, according to the Food and Agriculture Organization of the United Nations, because of the effects of climate change, growth in the world’s population, rising incomes in developing nations, slowing growth in crop outputs, and increased demand for alternative fuels.

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That make this a good time to cash in on the agriculture sector. IQ Global Agribusiness Small Cap ETF (symbol CROP (opens in new tab)) is the first ETF to offer investors exposure to global agricultural small businesses, including those involved in machinery manufacture, livestock operations, crop production and farming, bio fuels and alternative energy. The fund tracks the performance of the IQ Global Agribusiness Small Cap Index. But because the index itself was invented just last year, there is no long-term record to assess.

Among the ETF’s top holdings are Brazilian ethanol producer Cosan, U.S. meat processor Smithfield Foods and Viterra, a Canadian agribusiness that provides supplies from fertilizer to equipment and sells feed for cows and chickens. Although larger companies in this sector have run up in price, smaller companies -- as offered through this ETF -- may offer greater value. The ETF has an expense ratio of 0.75%.

If you think junk-bond prices are too lofty (the category returned 79% between March 9, 2009, and May 26, 2011), check out ProShares Short High Yield (SJB (opens in new tab)), the first ETF that lets investors bet against high-yield bonds. The ETF seeks to deliver the opposite of the return of the Markit iBoxx Liquid High Yield index on a daily basis. Annual fees are 0.95%.

Here’s the case for trashing junk: In late 2008, the yield gap between the typical junk bond and the ten-year Treasury bond was an astounding 22 percentage points. As junk-bond prices have risen, however, the spread has shrunk to four points -- low by historical standards. If investors decide that junk prices are too rich, or if the economic recovery falters, junk-bond prices will likely take a hit.

A basic rule of fixed-income investing is that when yields rise, bond prices fall. That’s because most bonds pay fixed interest rates. If those interest payments could rise with market rates, bonds could preserve their value and pay more, too. Sound like a good deal? If you think so, you’ll like PowerShares Senior Loan Portfolio (BKLN (opens in new tab)), the first ETF to invest in debt that adjusts payments with changes in short-term rates. The fund tracks the S&P/LSTA Leveraged Loan index, which consists mainly of loans made to borrowers with junk debt ratings. Annual expenses are 0.83%. The SEC yield is 4.4%. For more on floating-rate funds, see 11 Bond Funds That Won’t Get Soaked By Rising Rates.

An exchange-traded version of Pimco Total Return (PTRRX (opens in new tab)), the world’s largest mutual fund, is not exactly an offbeat product. Still, when Bill Gross, Total Return’s esteemed manager, decides that he wants to manage a bond ETF along the lines of Total Return, the news is noteworthy.

The performance of Pimco Total Return Exchange-Traded Fund (TRXT (opens in new tab)) is not likely to replicate the mutual fund’s results. The mutual fund limits junk bonds to 10% of assets, and securities denominated in foreign currencies are held to 30%. The ETF will have no such constraints. The ETF’s expense ratio has not yet been disclosed, but presumably it will be lower than that of any of the mutual fund’s share classes. Given lower fees and Gross’s impressive record, the ETF could be a winner.

For a contrarian view on Pimco Total Return, see VALUE ADDED: Should You Dump Pimco Total Return? Columnist Steve Goldberg thinks the fund has grown too large and suggests that bond investors look elsewhere.

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Jennifer Schonberger
Staff Writer, Kiplinger's Personal Finance