So, what is a Miscellaneous Sector ETF? Here’s how Morningstar defines this sector: “Miscellaneous sector portfolios invest in specific sectors that do not fit into any of Morningstar’s existing sector categories and for which not enough funds exist to merit the creation of a separate category.” This category mostly contains ETFs that specialize in alternative energy, clean technology and water related companies. Some of the newer ETFs in this category are focused on new or exponential technologies. There are currently 25 ETFs in this category. Fourteen of these ETFs have been available for 10 years or longer. These older 14 ETFs will be the focus of this article.
The oldest ETF in the Miscellaneous Sector category is the Invesco WilderHill Clean Energy ETF (PBW). As with most of the ETFs in this category, PBW has not performed very well vs an S&P 500 index fund. The ETFs that are focused on water related companies have done well, but the alternative energy ETFs have struggled.
PBW vs S&P 500 index fund: April 2005 – February 2019
Source: https://www.portfoliovisualizer.com/
Looking at the chart above, investors may decide not to invest in this esoteric ETF category. But there are some good ETFs in this group. The ETFs that focus on water related companies have performed relatively well. I have compared all 14 of the older ETFs in this category head-to-head. In the following chart, I have ranked these ETFs by their long-term performance. I did not use any other metric in this comparison. I did not consider quality, valuations, investor suitability or liquidity. Potential investors should perform their own due diligence prior to investing.
Source: https://www.morningstar.com/
The four funds with the best long-term performance were FIW, CGW, PHO and PZD. The first three are water related ETFs, while PZD is a Clean Technology ETF. The following charts will depict how these four ETFs have compared to each other and the S&P 500 over the last twelve years.
FIW vs CGW vs PHO vs PZD vs SPY: May 14, 2007 – March 17, 2019
Source: https://www.koyfin.com/home
FIW vs CGW vs PHO vs PZD: July 2007 – February 2019
Source: https://www.portfoliovisualizer.com/
Now that we’ve observed the past performance of the top four funds in the Miscellaneous category, let’s look at how these ETFs are constructed.
FIW – The First Trust Water ETF is an exchange-traded fund. The investment objective of the Fund is to seek investment results that correspond generally to the price and yield, before fees and expenses, of an equity index called the ISE Clean Edge Water Index. The ISE Clean Edge Water Index is a modified market capitalization-weighted index comprised of exchange-listed companies that derive a substantial portion of their revenues from the potable and wastewater industry. The Index begins by establishing the total population of stocks in the potable and wastewater industry and eliminates stocks which do not meet the Index’s baseline eligibility requirements. To meet Index eligibility, a stock must satisfy market capitalization, liquidity and weighting concentration requirements. The Index selects the top 36 stocks in the industry by market capitalization. The Index is rebalanced on the application of the above model on a semi-annual basis. (BEST LONG-TERM PERFORMANCE, LOWEST DRAWDOWNS, LOWEST EXPENSE RATIO)
CGW – The Invesco S&P Global Water Index ETF (Fund) is based on the S&P Global Water Index (Index). The Fund will invest at least 90% of its total assets in the securities American depositary receipts (ADRs) and global depositary receipts (GDRs) that comprise the Index. The Index is comprised of developed market securities including water utilities, infrastructure, equipment, instruments and materials. The index is computed using the net return, which withholds applicable taxes for non-resident investors. The Fund and the Index are rebalanced semiannually. (LOWEST VOLATILITY, HIGHEST DIVIDEND, LOWEST P/B RATIO, LOWEST TURNOVER RATIO)
PHO – The Invesco Water Resources ETF (Fund) is based on the NASDAQ OMX US Water Index (Index). The Fund generally will invest at least 90% of its total assets in common stocks and American depositary receipts (ADRs) and global depositary receipts (GDRs) of companies in the water industry that comprise the Underlying Index. The Underlying Index seeks to track the performance of US exchange-listed companies that create products designed to conserve and purify water for homes, businesses and industries. The Fund and the Index are rebalanced quarterly and reconstituted annually in April. (HIGHEST TRADING VOLUME)
PZD – The Invesco Cleantech™ ETF (Fund) is based on the Cleantech Index™ (Index). Cleantech considers a company to be a cleantech company when it derives at least 50% of its revenues or operating profits from cleantech businesses, which are defined as: businesses that provide knowledge-based products or services that add economic value by reducing cost and raising productivity and/or product performance, while reducing the consumption of resources and the negative impact on the environment and public health. The Fund generally invests in all of the securities comprising its Underlying Index in proportion to their weightings in the Underlying Index. The Fund and the Index are rebalanced and reconstituted quarterly. (BEST SINGLE-YEAR PERFORMANCE, LOWEST U.S. MARKET CORRELATION, LOWEST P/E RATIO)
The Morningstar Miscellaneous category is very small, relatively new and it contains a hodgepodge of diverse ETF types. For this reason, new investors should consider this a speculative investment rather than long-term. While alternative energy ETFs continue to struggle to be a profitable venture, there is some evidence that owning an ETF focused on water resources could be investment worthy. Investors should perform their own due diligence prior to committing their investing dollars to this category.
Thank you for taking time to read this article. If you found it useful, please share it with a friend.
Respectfully yours, Micah McDonald, aka the Deep Value ETF Accumulator
Disclosure: We own shares of FIW, and we intend to buy more shares in the future. I am not a professional investment advisor. Please perform your own due diligence or seek assistance from a Registered Investment Advisor prior to investing in any fund mentioned in this article.
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