ETFs for the most part offer low-cost diversification, liquidity and greater
transparency than other packaged investment strategies such as mutual funds or
units of investment trust. Most ETFs focus on replicating an index and capture
profits when the group as a whole performs well. With so many ETFs bringing to
market basically the same strategies, diversification in these portfolios can be
harder to attain. Moving away from the mainstream index-based ETFs, a few
portfolios bring the liquidity and transparency properties of traditional ETFs
and adapt these to strategies that offer little or no correlation to general
market fluctuations. Holding assets in such programs can help reduce overall
portfolio risk and possibly enhance returns. One such ETF is the IQ Merger
Arbitrage ETF (NYSE: MNA ). MNA is a relative newcomer, starting on Nov. 17,
2009, and the funds philosophy is to invest in companies that have been the
target of a public merger announcement. MNA hedges its positions by taking a
short global equity approach. The top 10 holdings and weightings are listed
below. Motorola Mobility (NYSE: MMI ): 12.37% Invesco Treasury Institutional :
8.43% Southern Union (NYSE: SUG ): 6.82% Cepahlon (NASDAQ: CEPH ): 6.15% Cash :
5.99% National Semiconductor (NYSE: NSM ): 5.68% Varian Semi Equi (NASDAQ: VSEA
): 5.27% Family Dollar (NYSE: FDO ): 4.89% Autonomy Corp PLC: 4.54% Foster's
Group: 4.39% The historical returns of MNA , based on price, as of Aug. 31,
2011, are listed below: 1 month : -3.1% 3 month s: -3.53% YTD : -1.42% 1 year :
-1.89% 3 years : 0.06% This is an event-driven strategy, and the payoff will
occur when the merger arbitrage of the holdings generate profits. Or, simply
put, MNA bets on corporate marriages. This strategy can be exemplified by its
holding in NSM Texas Instruments (NYSE: TXN ) completed its acquisition of
National Semiconductor on Sept. 23. The next ETF is the Guggenheim Spin-Off ETF
(NYSE: CSD ). CSD plays opposite MNA by taking stock positions in companies that
have been spun off within the past 30 months. In other words, CSD bets on
corporate "divorces. This too is an event-driven approach and is subject to
when corporate breakups are announced. The top 10 holdings and weightings are
listed below. Brookfield Infrastructure (NYSE: BIP ): 7.01% Ascent Capital :
6.98% Philip Morris International (NYSE: PM ): 6.53% Lorillard (NYSE: LO ):
6.48% HSN (NASDAQ: HSNI ): 5.84% Altisource Portfolio Solution (NASDAQ: ASPS ):
5.8% Total System Services (NYSE: TSS ): 5.23% Time Warner (NYSE: TWC ): 5.16%
Echostar (NASDAQ: SATS ): 4.71% Clearwater Paper (NYSE: CLW ): 4.67% As of Aug.
31, 2011, the returns, based on market price, are listed below: 3 months :
-10.33% YTD : -2.46 1 year : 17.68% 3 year : 2.66% Since inception : -1.25% The
last program to consider is the JPMorgan Alerian MLP Index ETN (NYSE: AMJ ). AMJ
is an exchange-traded note that pays a variable quarterly rate of interest
generated by the income it collects on its holdings. AMJ holds several
energy-based master limited partnerships. The advantage to this is the investor
does not receive a K-1 partnership tax form every year. AMJ was created on April
2, 2009, and the note matures on May 24, 2024. The top 10 holdings and
weightings are listed below. Enterprise Products Partners LP (NYSE: EPD ):
14.04% Kinder Morgan Energy Partners LP (NYSE: KMP ): 9.64% Energy Transfer
Partners LP (NYSE: ETP ): 5.03% Plains All American Pipeline LP (NYSE: PAA ): 5%
Energy Transfer Equity LP (NYSE: ETE ): 4.82% Linn Energy LLC (NASDAQ: LINE ):
4.39% Magellan Midstream Partners LP (NYSE: MMP ): 4.36% Buckeye Partners LP
(NYSE: BPL ): 3.59% Kinder Morgan Management LLC (NYSE: KMR ): 3.49% Oneok
Partners LP (NYSE: OKS ): 3.21% The returns associated with AMJ, as of Aug. 31,
2011, are listed below: 1 month : -2.77% 3 months : -3.36% YTD : 0.15% 1 year :
15.74% This portfolio of energy-driven limited partnerships has a limited
lifespan. AMJ does a good job in selecting a group of energy-based programs,
placing them into an ETN that is more tradable than the individual LP units, and
offers a variable rate of returns without the tax-reporting implications.
Because this program is based on a unique set of holdings, investors seeking
diversification should consider adding this ETN to their portfolio. Jeffrey L.
Stouffer is the principal of Mercantile Capital Group, a Herndon, Va.-based
introducing broker registered with the CFTC and a member of the National Futures
Association. He can be reached at mercapitalgroup@aol.com . Stouffer does not
own any direct or indirect holdings in any of these ETFs.
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