Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you’d like to manage the volatility of the stocks in your portfolio but don’t have the time or expertise to hand-pick your holdings, the VelocityShares Equal Risk Weighted Large Cap ETF could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously. It includes the S&P 500 holdings, weighted by their riskiness, so that each contributes an equal amount of risk.
ETFs often sport lower expense ratios than their mutual fund cousins. The VelocityShares ETF’s expense ratio — its annual fee — is 0.65%. The fund is very small, too, so if you’re thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This ETF is too young to have a sufficient track record to assess. As with most investments, of course, we can’t expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
Why equal weight?
Unbeknownst to us, many indexes are structured sub-optimally. The venerable Dow, for example, simply averages the stock prices of its 30 components. The S&P 500 and many others simply weight their holdings by market cap, so that bigger companies hold more sway. Others do things differently, such as this ETF, with its aim of evening out the riskiness (and volatility) of its holdings.
More than a handful of this ETF’s top holdings had strong performances over the past year. Natural gas specialist Spectra Energy Corp. (NYSE:SE) surged 26%, and recently yielded 3.4%. Spectra Energy Corp. (NYSE:SE) has been challenged by low natural gas prices, an oversupply, and few rigs, but as those factors turn around, its business should pick up. Meanwhile, the company has been inking some promising partnerships. Along with NextEra Energy, it has been awarded a contract to build a $3 billion natural-gas pipeline into Florida. It’s also angling to boost dividend payouts via a reorganization. The company recently moved many miles of pipeline to its master limited partnership, Spectra Energy Partners.
BMC Software, Inc. (NASDAQ:BMC) gained 18% over the past year, with shareholders approving a $6.9 billion take-private bid by a Bain Capital-led consortium of private equity buyers. Some have been disenchanted with the company, due to shrinking profit margins and sluggish growth, along with concerns over its competitive strength. Why are private-equity firms interested? Well, they can load up the companies with debt, profit off the company, and then often relaunch it on the stock market, as a new stock carrying a heavy debt burden. This is often how it works.