The exchange traded fund (ETF) universe offers a breathtaking array of options to choose from. The latest addition to this universe is the pure-play ETF, which gives investors very focused exposure to a sector. With that focused exposure, though, comes more risk.
ETFs were initially passive vehicles used to mirror the performance of broad stock market indexes, especially those of foreign exchanges, says Larry D. Spears of Money Morning. Over time, however, the domain of ETFs has expanded to include actively managed funds.
A derivative of the actively managed ETF is the The Teucrium Corn Fund, which will offer investors a “well-diversified” corn asset pool consisting of just three futures contracts. The idea is that a blend of three different futures will lower the volatility of trading corn and eliminate futures margin requirements. [Financial ETFs: Future Opportunity?]
However, according to Spears, that provides little advantage to traders who actually need to make corn investments. Thus, he thinks that the ETF will end up as another way for speculators to bet on the corn market.
Shah Gialini of Money Morning doesn’t think that that would be a particularly bad thing. He says, “The level of diversification within the ETF itself is not nearly as important as the added diversification an investor can get by including focused ETFs in his or her portfolio.” [Leveraged ETFs Take Center Stage.]
Depending on your view, pure-play ETFs may or may not be an attractive vehicle. In and of themselves, they may not provide enough diversification. But, if you view them as a way to diversify your portfolio in ways normal stocks and bonds wouldn’t allow you to, then the pure-play ETFs may very well be a welcome innovation. [Commodity ETFs Take It on the Chin.]
Sumin Kim contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.