Exchange-traded funds, or ETFs, are a staple for most investors, providing a simple way to invest in broad stock or bond market indexes, but ETFs can be far more than a passive investment tool. They can cater to niche strategies, exposing investors to specific investing themes or approaches.
[Sign up for stock news with our Invested newsletter.]
While index funds are enough for most, those looking to fine-tune their portfolio should be familiar with these seven thematic ETFs:
| ETF | Expense Ratio |
| IQ Merger Arbitrage ETF (ticker: MNA) | 0.76% |
| Roundhill Generative AI & Technology ETF (CHAT) | 0.75% |
| Cambria Tail Risk ETF (TAIL) | 0.59% |
| Simplify Interest Rate Hedge ETF (PFIX) | 0.5% |
| iShares USA Momentum Factor ETF (MTUM) | 0.15% |
| Global X S&P 500 Covered Call ETF (XYLD) | 0.6% |
| Saba Closed-End Funds ETF (CEFS) | 2.42% |
IQ Merger Arbitrage ETF (MNA)
Merger arbitrage is a trading strategy that profits from merger and acquisition transactions.
When one company buys another, the target company’s stock often trades at a discount to the agreed acquisition price. This is due to concerns about the deal falling through, regulatory obstacles and accounting for the time value of money.
For instance, when Microsoft Corp. (MSFT) announced its acquisition of Activision Blizzard Inc. (ATVI) for $95 per share last year, ATVI’s stock price only rose to about $85 due to fears the deal would fail or stall because of antitrust issues.
Merger arbitrage traders capitalize on these price differences and generate profits uncorrelated to broad stock market returns. However, successfully executing the strategy requires in-depth knowledge of mergers and acquisitions, U.S. law and the regulatory environment.
Investors looking to benefit from a source of potentially uncorrelated returns should consider the IQ Merger Arbitrage ETF. Managed by New York Life, the ETF is currently invested in acquisition targets like World Wrestling Entertainment Inc. (WWE) and Seagen Inc. (SGEN).
Roundhill Generative AI & Technology ETF (CHAT)
Everyone is familiar with ChatGPT, the AI chatbot that can pass the bar exam. Nvidia Corp. (NVDA) CEO Jensen Huang called the tech AI’s “iPhone moment” and “one of the greatest things that has ever been done for computing.”
The chatbot set the world on fire with its November 2022 release, and tech giants have since been in a race to capitalize on AI’s potential.
The stock market noticed too, and any stock with ties to artificial intelligence has been soaring. However, like all market trends, there’s always a new flavor of the week. With market preferences shifting rapidly, most investors would be better suited to gaining broad exposure to the AI theme rather than chasing their tails trying to buy the hottest new AI stock.
In response, Roundhill Investments created the Generative AI and Technology ETF, a balanced approach to AI investment. The ETF invests in companies across the globe that harness generative AI technology, using a mix of blue chips like Nvidia and Alphabet Inc. (GOOG, GOOGL) and smaller, more speculative names like SoundHound AI Inc. (SOUN).
Cambria Tail Risk ETF (TAIL)
In the unpredictable world of financial markets, it’s often wise to prepare for the worst. Market crashes can be sudden and violent, allowing little time to react until it’s too late.
The Cambria Tail Risk ETF is designed to protect investors against those unforeseen circumstances, often called “tail risks.” Think of TAIL as an insurance policy to safeguard your portfolio from the worst-case scenario.
While it’s natural for such a hedge to gradually diminish in value, much like paying an insurance premium, it’s designed to surge during market calamity, providing a safety net when most needed.
The fund has Mebane Faber, host of the popular Meb Faber Show, as its portfolio manager.
[READ: 7 Stocks That Outperform in a Recession.]
Simplify Interest Rate Hedge ETF (PFIX)
Interest rate volatility hasn’t been much of a problem for most investors over the last few decades. But times have changed. With 2022’s record interest rate hiking campaign by the Federal Reserve in the rearview mirror, interest rate volatility has thrust itself into the limelight, becoming a focal point in portfolio management.
March’s banking crisis, triggered mainly by interest rate volatility, is a stark reminder of its potential destruction.
The Simplify Interest Rate Hedge ETF aims to safeguard investors against a rise in long-term interest rates. Traditional rate hedges like futures or over-the-counter derivatives can be difficult to manage or inaccessible to individual investors.
Simply Asset Management aims to bridge this gap by tapping the derivatives market on investors’ behalf, allowing them to access hedges that only Wall Street could previously.
PFIX provides a rate hedge akin to a long-dated put option on 20-year U.S. Treasurys, meaning that it’s designed to soar in value if long-term interest rates surge.
The pitch is clear: If long-term interest rates ascend, PFIX stands to profit. With most investors exposed to some form of duration risk in the form of bonds, real estate or even growth stocks, PFIX becomes an attractive tool to protect against portfolio catastrophe.
iShares USA Momentum Factor ETF (MTUM)
Momentum investing, at first glance, seems like the antithesis of sound investing principles. In a word, you can call it “buying what goes up,” or what some like to call it, “buy high and sell higher.”
But oddly enough, momentum is one of the few investment “factors” well accepted by academia and financial professionals alike to deliver excess returns over stock indexes.
There’s a caveat, though. You can’t simply buy any rapidly rising stock. In fact, harnessing the momentum factor typically requires a diversified portfolio of stocks that meet specific criteria. Not to mention the litany of human biases or the high portfolio turnover.
Thanks to the magic of ETFs, investors can access momentum strategies’ returns by purchasing a momentum ETF like the iShares USA Momentum Factor ETF, which offers a diversified portfolio of systematically chosen momentum stocks.
Global X S&P 500 Covered Call ETF (XYLD)
Income investors often lean on covered calls. By selling call options against stocks they own, they can earn premiums in exchange for forgoing some upside.
However, actively managing a covered call strategy is intricate. It demands proper strike price, expiration-date management and good trade management.
Investors looking for extra income without the stress of active trading should look to the Global X S&P 500 Covered Call ETF.
Managed by Global X, XLYD automates the process, selling calls against the S&P 500 systematically, and boasts a solid 8.4% trailing-12-month yield.
Saba Closed-End Funds ETF (CEFS)
Closed-end funds are quite similar to ETFs but without the ability for the fund to adjust its share counts to match its net asset value, or NAV.
Because closed-end funds are out of fashion in favor of ETFs, many of these funds are “orphaned” by the market and trade at a substantial discount to their NAV, presenting an arbitrage opportunity.
The Saba Closed-End Funds ETF was created to exploit this arbitrage. It provides investors diversified exposure to a portfolio of closed-end funds that trade at a discount, offering investors an easy way into this niche market.
More from U.S. News
3 Ways to Invest in Rare-Earth Stocks
7 Small-Cap Value ETFs to Buy in 2023
9 Best Cheap Stocks to Buy Under $10
7 Best Thematic ETFs to Buy originally appeared on usnews.com
Update 08/23/23: This story was published at an earlier date and has been updated with new information.
