Exchange Traded Baskets?

The other day IndexUniverse had a post about a newly filed for fund from Van Eck that will target minor metals. At first glance this sounds interesting. If the stocks that will be targeted can somehow blend together in such a way as to differentiate from ETFs that cover, what, major metals then it could gain traction.

In that article I noticed that the index provider will be Structured Solutions AG which is the same index provider for the GlobalX China sector ETFs. I found Structured Solutions' website and their list of indexes they have and Sweet Fancy Moses do they have a lot of interesting things most of which will never get made into funds.

But to the title of this post, as I was looking at some of the indexes I was reminded of a post from a long time ago, that I was not able to find, about a possible next step in the exchange traded product world. Some of the indexes created by Structured Solutions do not have enough components to meet diversification rules to be an ETF but perhaps a new product that I might call an exchange traded basket could be structured to bypass the concentration issue.

While a fund that holds seven stocks will frequently be less risky than holding one stock maybe there could be some sort of options paperwork-like screening before people would be allowed to buy the ETBs but to be clear I am talking baskets of stocks.

For example the Solactive Sports Betting Total Return Index has seven holdings, four of which are target at 20% of the index. William Hill PLC is of the four targeted at 20%, it averages more than three million shares traded per day in London so it is not the most obscure company in the world and sports betting would be part of the discretionary sector so it is not inconceivable that someone would want to buy the stock. YTD it has done slightly better than the FTSE 100, been more volatile than that index and had a very low correlation. That combo clearly appeals to someone, hence the decent volume.

Some people might prefer to buy a small basket of these stocks instead of just one but there are not enough stocks to fill out an ETP as we think of them so the basket idea could work here.

Structured Solutions has indexes for timber, forestry (yes those are two different products), fertilizer, N-11 Infrastructure, Croatia, rare earth elements and so on. I did not see one for global equity exchanges but that would be an interesting one too.

I'm sure someone will say how ridiculous these are but for people willing to use individual stocks or narrow based ETF these indexes fit right in with core and explore. For example the idea of putting most of a portfolio's industrial sector allocation into something like the Industrial Sector SPDR (XLI) and a small portion into something like the N-11 Infrastructure ETB (assumes the index is very heavy in industrial stocks which I am not certain of) is not insanity. Would you buy a water ETF (we own one)? Well water is simply a different theme than N-11 Infrastructure within the same sector and at times water will do better but at other times the N-11 Infrastructure would do better even if there were only nine stocks in that particular N-11 index.

If you forget what N-11 is you can click here for more information.

Again it is very unlikely that too many people would own a lot of these, if they existed, but at some point there will be some rather obscure theme that will interest you that will have very few alternatives and having a fund among the choices, even if it only holds nine things, instead of a stock will be preferable.

There is another element to this discussion for people who do pick stocks that is worth mentioning. In looking at these indexes I stumbled across a company called Pretoria Portland Cement which has an ADR with ticker PPCYY.

I'd never heard of it but it makes cement in eight locations in South Africa and also has operations in a couple of other countries. It is a small company with only a 1% weight in the iShares South Africa ETF (EZA). It does not appear to be a reverse merger completed last month as financial records on the company website go back to 2000. The company has been profitable for a long time, in terms of volatility the ADR appears to trade inline with EZA and based on its last dividend (per Pinksheets.com) it yields 5.8% versus 1.8% for EZA.

As first impressions go that is enough for me to want to follow it and really study it should I ever decide to add South Africa across the board although liquidity might be an issue with that one. I'm sure that if EG Shares ever lists a South Africa Infrastructure ETF that Pretoria Portland Cement would be a large holding.

These obscure indexes and funds have all sorts of interesting companies to learn about which is very useful for people willing to buy individual stocks.

I believe the picture could best be described as "a dry heave set to music."