ETF EDUCATION CENTRE

What are some of the other ETFs?

Indeed, we have just scratched the surface. And yes, there are thousands of ETFs. Most of them aren't based on major indexes and are very focused in their mandate. There is an ETF for almost every investment idea out there and there are hundreds more coming to market every month. These days, there is an ETF that only tracks sugar (ETFS Sugar, SUGA/LSX) and another that invests solely in solar and wind-energy companies (PowerShares Clean Energy Portfolio, PBW/NYSE). Sometimes, an ETF can become extremely specific in its mission. The HealthShares Emerging Cancer ETF (HHJ/NYSE), for example, exclusively holds the shares of young companies that are in the early research-stages of creating cancer-fighting drugs. ETFs are like the thousand-channel digital cable package - there is a something for everyone, no matter how small the audience.

In Canada, the ETF market is still relatively underdeveloped (compared to the U.S.) so we haven't seen an ETF yet that tracks canola (though with rising commodity prices, that might not be a bad idea). Still, there a few interesting investing ideas in the ETF sector in Canada that are worth mentioning.

Heavily promoted as of late, the family of ETFs from Horizons BetaPro is intriguing to sophisticated investors. Horizons run a host of funds that are specifically designed to exaggerate the returns of regular indexes and also run others that are designed to reward the investor when the markets go down. The HBP S&P/TSX 60 Bull Plus Fund, for example, corresponds to two times the movement of the regular S&P/TSX 60 index - each 2% rise in the index translates to a 4% jump in the fund's value. On the other end, the HBP S&P/TSX60 Bear Plus Fund moves inverse to the index, but at twice the rate. In other words, if the index dips 2%, the Bear Plus Fund rises 4% in value.

Claymore Investments, one of the three ETF providers in this country, also has a few sector-specific ideas that are unique. Claymore often creates its own indexes specifically for its ETFs. For example, the Claymore Oil Sands Sector ETF owns a basket of Canadian oil sands stocks. The firm has also recently jumped on the agricultural-commodity bandwagon and launched the Claymore Global Agriculture ETF (COW/TSX), which has holdings in major farm-related companies from around the world. It also has tried to capitalize on the "water thesis" - with drinking water becoming scarce, companies with technologies that clean water or provide access to clean water will become increasingly valuable - by launching the Claymore S&P Global Water ETF (CWW/TSX).

For the ethically-minded, Barclays in Canada offers an ETF that invests only in companies that have been approved by independent researchers as socially responsible called the Canadian Jantzi Social Index Fund (XEN/TSX).

But ETFs don't necessarily last forever and sometimes, they die from neglect, or in other words, lack of trading. The ETF market is exploding and portfolio management companies are jostling to get a piece of the action, which is why we've seen so many new funds grab the public's attention in the past two years. ETFs, in many ways, are no different than any other consumer product such as cars or high-definition DVD players - some are more popular than others and the very unpopular ones often fall by the wayside. In February, Claymore Investments in the U.S. shuttered 11 of its 37 exchange-traded funds because there wasn't enough interest to sustain them. Among the funds that closed down was a health-care fund that invested in companies that made vaccines.

It's also important to note that even among the ETFs that are on the market, the majority of them are very small with tiny market capitalizations and paltry volumes, which means it's difficult for investors to buy or sell the fund at will. The Claymore/Robb Report Luxury Index (ROB/NYSE), for example, invests in companies that cater to the wealthy but the fund itself is hardly rich - its market cap is less than $10-million and the average daily volume is a paltry 2,000 shares.

The key is to do your homework. Before you invest in an ETF, make sure it has enough volume and interest to sustain it. And when it comes to new ETFs, it's most prudent to wait a few weeks to gauge investor interest before you make a move to buy. As much as you may be enamored with the idea of a fund that only trades in pork bellies, the rest of the investing world might not be so keen. The last thing you want is to be stuck in a fund that you have a hard time getting out of due to low trading volumes.