The Savvy Investor’s Guide To Exotic ETFs!

| February 23, 2013

The World Of Non-Traditional ETFs

With the skyrocketing popularity of ETFs, it’s no surprise that ETF products are branching into more exotic territories.

What’s an exotic ETF?  Essentially, it could be just about anything.  But, to simplify it as much as possible, it’s an ETF that ventures into more “non-traditional” investments. 

A traditional ETF tracks a market index or a sector index.  Many exotic ETFs still may track an index, but it’s going to be more of a niche product (such as a multi-strategy ETF tracking a basket of indices).  Or, they don’t have to track an index at all (such as some ETFs investing in futures and options).

Let’s take a look at four different exotic ETFs. 

Exotic ETF #1: Buy Write Funds

The PowerShares S&P 500 BuyWrite Portfolio (PBP) kicked off at the end of 2007.  This exotic ETF tracks a theoretical buy-write portfolio.

What’s a buy-write portfolio? 

Basically, it’s a covered call portfolio where the stocks are bought at the same time the options are sold.  It’s a good way to consistently generate a positive return on investment while keeping risks low.

PBP invests at least 80% of its total assets in stocks on the S&P 500.  A portion of the remaining capital is used to sell (or write) call options against those stocks.

This type of strategy, a buy-write strategy, is very common. 

But, PBP saves you the trouble of having to figure out and execute all the different trades yourself.  You simply buy PBP and watch the strategy work – while your returns flow in. 

Exotic ETF #2:  Private Equity Portfolio

Ever wanted to have your very own private equity portfolio?

Well, with ETFs you can.  Look no further than PowerShares Global Listed Private Equity Portfolio (PSP).

PSP invests its assets in 40 to 75 private equity companies around the globe (that are publicly traded).  The principal business of these companies is to invest in, lend capital, or provide services to privately held companies.

A private equity ETF makes it possible for anyone to invest in the world of private equity.  And, it’s as simple as buying one ETF.  

Exotic ETF #3:  VIX (Volatility Index) ETFs

Volatility has become increasing important as a fear gauge for investors.  More and more people are looking to the VIX (CBOE S&P 500 volatility index) for information about market sentiment.

The VIX is the perfect item to trade through ETFs.  The index doesn’t trade itself, and prior to ETFs, the only way to trade the VIX was by using futures or options.

Now, there are multiple ETFs that track the VIX.

One such product is ProShares VIX Short-Term Futures ETF (VIXY). 

VIXY tracks VIX short-term futures.  That is, investing in VIXY is similar to investing in whatever the two front months are for VIX futures.

Basically, you’re investing in what may happen to volatility in the short-term.   It’s a very good way to make money or protect your portfolio if you’re worried about a short-term market selloff.

And, it’s exactly the sort of thing that would be extremely difficult to do for the average investor without ETFs.  

Exotic ETF #4:  Multi-Strategy

We’ve all heard of hedge funds, but many of us have never had the opportunity (or the money) available to invest in them.  Here, once again, ETFs open up a whole world of investment opportunities to investors.

One such ETF is IQ Hedge Multi-Strategy Tracker ETF (QAI).

QAI works as sort of a fund of funds.  It tracks a combination of several popular hedge fund strategies including long/short equity, global macro, market neutral, event-driven, fixed income arbitrage, and emerging markets.

This type of strategy mix generally is a low risk, stable return investment.  And, it’s now easily available to any investor with the click of a button.  

A Final Word

That’s just a few of examples of exotic ETFs.  There’s a whole world of non-traditional ETFs for investors to dig into.

We talked about buy-write strategies, private equity, VIX, and multi-strategy.  But, that just scratches the surface of what’s out there.

There are dozens of commodity ETFs, typically based on futures products.  There are managed futures ETFs, leveraged ETFs, bearish ETFs, you name it – it probably exists. 

Actively managed ETFs are also growing in popularity.

Sooner rather than later, investors will be able to accomplish whatever strategies they desire by using ETFs.  And, that’s a very good thing for the investment community.


Because ETFs are far cheaper and easier than doing these strategies yourself or paying someone to do them for you.  These exotic ETFs are leveling the playing field for the average investor.

And that’s clearly a good thing.



Robert Morris, Senior ETF Strategist

ETF Trading Research

Category: ETFs

About the Author ()

Wall Street veteran and ETF specialist Robert Morris helped created ETF Trading Research in order to help investors get the most out of their ETF investments. Before creating ETR, Robert worked for a number of prestigious Wall Street firms such as Salomon Smith Barney, UBS, Hyperion Financial and Charles Schwab.

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