Investors can create specific portfolio scenarios by using specialized
. They can target industries, regions and trends without having to pick individual
PowerShares unit has been a leader in specialized
Global Progressive Transportation Portfolio
, which tracks green transportation trends, is one of its more notable funds.
Even though specialized ETFs haven't gained traction with investors, the funds can help manage volatility in a portfolio and take advantage of the stock market's cycle. The performance of specialized ETFs like the Global Progressive Transportation ETF depends on both industry developments and big-picture trends.
Anyone who considers investing in such a fund should look at it from both a "bottom up" and "top down" perspective. Investors need to research the financial state of the companies the fund holds, the demand for their products and industry trends. They must also weigh macroeconomic factors, such as the direction of the market.
Small companies usually outperform as bear markets turn bullish. Investing in green transportation companies could be a risky bet, but they could deliver bigger returns than mega-cap conglomerates early in the market cycle. Large companies tend to lead in the later stages of a bull market.
This is an important aspect of navigating market cycles. In the early stage of a bull market, it makes sense to increase a portfolio's volatility. As the bull market matures, investors should reduce volatility.
When considering a portfolio's sector breakdown, the Global Progressive Transportation ETF should be viewed as part of the industrial weighting. For some investors, it might make sense to devote half a portfolio's industrial allocation to the PowerShares fund and the rest to a broader industrial fund, such as the
Industrial Select Sector SPDR ETF
. Later, it might make sense to rebalance the segment so that 25% of the weighting is in the PowerShares fund and 75% is in the other ETF.
Even though the Global Progressive Transportation ETF invests in a subset of industrial companies, it has outperformed funds that invest more broadly in the sector. The fund has lost 12% since it hit the market in September, dropping less than the Industrial Select Sector SPDR ETF and the
iShares Dow Jones Transportation Average Index Fund
. These funds invest in larger companies and have lost more than 30% of their value during that time.
Industrial companies make up 73% of the PowerShares fund while consumer discretionary stocks account for another 12%. Geographically, 37% of the ETF is invested in American companies.
The PowerShares fund differs from the more popular Industrial Select Sector SPDR in several ways. Two-thirds of the PowerShares fund is invested abroad, while the SPDR ETF is entirely domestic. The average market cap of companies in the PowerShares fund is $6.8 billion versus $36 billion for the SPDR fund. The PowerShares fund owns specialized companies and the SPDR holds large conglomerates like
The fund's three biggest holdings are battery companies. China's
accounts for 5.7% of the ETF's assets.
make up another 5.3% and 4.8%, respectively. Further down the list are railway companies, truckers and shippers.
This article isn't about buying the Global Progressive Transportation ETF. It's about taking advantage of investment products available to manage the volatility of a diversified portfolio.
At the time of publication, Nusbaum held shares of United Technologies, although positions may change at any time.
Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;
to send him an email.