ETF, the Sequel: Now in a Portfolio Near You

Buzz Lightyear, Hamm, Mr. Potato Head, Bo Peep, Rex, and Slinky Dog in "Toy Story 2." Photograph: Walt Disney Co./Everett Collection Close

Buzz Lightyear, Hamm, Mr. Potato Head, Bo Peep, Rex, and Slinky Dog in "Toy Story 2."... Read More


Buzz Lightyear, Hamm, Mr. Potato Head, Bo Peep, Rex, and Slinky Dog in "Toy Story 2." Photograph: Walt Disney Co./Everett Collection

Just like movies, successful exchange-traded funds spawn sequels, and more are being churned out than ever. Will they be the "Toy Story 2's" of the ETF world? Or the "Dumb and Dumberer's"?

One sequel that has yet to attract an audience and shows that there are no guarantees is the iShares 0-5 Year Investment Grade Corporate Bond ETF (SLQD). It's a follow-on to the $16.5 billion iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD). Since its launch six months ago, SLQD has attracted just $10 million and is up 1 percent to LQD's 3 percent.

But many sequel ETFs have lived up to the promise of the original, and then some. Here’s a look at five of the best-performing examples of the past few years. These ETFs adhered to the formula, the structure and even the ticker of the original but added a new twist that appealed to investors.

SPDR Barclays Short Term High Yield Bond ETF (SJNK)

SJNK is a follow-on to the $10 billion SPDR Barclays High Yield Bond ETF (JNK), which tracks a basket of high-yield bonds. SJNK, like the original, holds junk bonds, just with shorter maturities. That gives it about half the interest rate risk as JNK. Does that mean its return and yield take a similar cut? Nope. SJNK has returned 16 percent since its March 2012 inception, compared to 18 percent for JNK. It yields 5.2 percent, a smidgen less than the original.

That explains why investors plowed $2.5 billion into SJNK last year -- the same amount they took out of JNK. If the bond-purchase tapering by the Federal Reserve continues and interest rates creep up as many expect, SJNK could grow bigger than JNK within a couple of years. Its success has led to a full JNK trilogy with the launch last week of the SPDR Barclays International High Yield Bond ETF (IJNK). All three charge investors 0.40 percent of assets annually.

Market Vectors Junior Gold Miners ETF (GDXJ)

GDXJ is the sequel to the $9 billion Market Vectors Gold Miners ETF (GDX). That giant is the most-traded sector ETF -- over a billion dollar's worth of shares are exchanged each day, more than for Ford Motor Co. (F) and Wal-Mart Stores Inc. (WMT) combined. In the current rebound among gold miner stocks, GDX is being outpaced by GDXJ, which tracks smaller gold miner companies. GDX is up 15 percent for the year; GDXJ is up 21 percent.

Investors have taken notice. In two months this year, GDXJ, which was launched in 2009, doubled in size to $2 billion. That was thanks to strong inflows -- it took in $570 million to GDX's $450 million for the year so far -- and the surprise rally in gold-mining stocks. In a sell-off, though, GDXJ will most likely fall harder than its predecessor. It's nearly twice as volatile as GDX, which is itself twice as volatile as the S&P 500. GDXJ has an expense ratio of 0.55 percent, a touch above GDX’s 0.52 percent.

Vanguard Total International Bond ETF (BNDX)

BNDX has a tough act to follow -- it's the sequel to the $19 billion Vanguard Total Bond Market ETF (BND), the largest bond ETF in the world. So far, BNDX is holding its own. It was the most successful new ETF launch of 2013 and has raked in just under $1 billion in assets since it came out last June.

BNDX is essentially the international version of BND. In keeping with Vanguard’s reputation for offering ETFs that are “cheap and deep,” it tracks 2,300 investment-grade international bonds in 50 countries and charges an expense ratio of 0.20 percent, by far the cheapest among international bond ETFs. Since its inception, BNDX has returned 2.1 percent to BND’s 0.9 percent.

ALPS International Sector Dividend Dogs ETF (IDOG)

IDOG is the follow-on to the ALPS Sector Dividend Dogs ETF (SDOG). The original Dividend Dogs product tracks the five highest-yielding large-cap stocks in each sector and weights them equally; every sector gets a 10 percent weight. The name refers to the “Dogs of the Dow” theory, which posits that companies with the highest dividends relative to their stock price are near the bottom of their business cycle -- looking doggy -- and should outperform low-yielding stocks as they recover. Both SDOG and IDOG elude a popular rap against many dividend ETFs, which is that they invest too heavily in sectors such as utilities and consumer staples.

Since its launch last June, IDOG is outpacing SDOG, with a 20 percent return to its 13 percent. That’s thanks to its exposure to stocks in Europe and Japan. IDOG has $100 million in assets, a strong showing for any ETF under a year old. IDOG comes in a bit higher in expenses, charging 0.50 percent to SDOG's 0.40 percent. An Alps Emerging Markets Sector Dividend Dogs (EDOG) is in registration with the SEC, awaiting regulatory approval.

Global X SuperDividend U.S. ETF (DIV)

DIV is the sequel to the popular Global X SuperDividend ETF (SDIV), which tracks the highest-yielding securities in the world, regardless of market cap, and equal-weights them in the portfolio. DIV tracks just U.S. companies. Since its inception a year ago, it’s up 13 percent compared with 10 percent for SDIV, and got there with less volatility. Both ETFs yield just over 6 percent.

With rates so low, these ETFs have tapped into investors’ thirst for yield. Part of the reason both can pump out so much yield is that their portfolios include “pass-through” securities such as master limited partnerships and real estate investment trusts (REITs). These securities tend to have higher dividends because they're required to pass on any gains in the form of dividends. While SDIV has $800 million in assets, IDIV weighs in at $71 million. It's cheaper than its predecessor, charging 0.45 percent, versus 0.58 percent for SDIV.

Eric Balchunas is an exchange-traded-fund analyst at Bloomberg. More ETF data is available here, and weekly ETF podcasts can be found here.

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