The growth and evolution of the ETF industry is a story of investor demand. In the past, investors have been satisfied having access to products that have the ability to mimic the performance of benchmark indexes, but many are increasingly seeking out funds that try to beat the performance of their benchmarks. In order to meet this demand, a number of top providers have taken to launching active and pseudo-active ETF products.
Unlike traditional, passive ETFs which employ market-cap weighted indexing strategies, pseudo-active ETFs determine individual holdings based on a collection of criteria or a formula.
One popular of the more popular ETFs which makes use of an alterative indexing strategy is FCG.
In the past I have looked to this fund as an adequate proxy for playing the popular natural gas arena. Rather than using the
United States Natural Gas Fund
, a futures backed product plagued contango and targeted by regulators, FCG tracks a basket of companies dedicated to the exploration and production of this fuel.
FCG is designed to track the ISE-Revere Natural Gas Index. Unlike a market cap weighted index, this basket of companies is equal weighted. According to the First Trust website, constituents chosen for the index are determined based on a number of metrics including price/earnings ratio, price/book ratio, return on equity and correlation to natural gas future prices. In the end, a total of 30 companies are chosen to represent the index.
FCG's make-up is not permanent. Each quarter, First Trust evaluates the natural gas industry based on the stated criteria and makes any needed changes. While some of these are minor tweaks, as shown by the fund's current state, dramatic changes can and do occur.
Comparing the fund's current index to that of May 31, 2010 (a month after and a month before the rebalancing), one can see a number of significant alterations.
Before the rebalancing, FCG's top five holdings included firms such as
Pioneer Natural Resources
Today, FCG's top holdings have shifted to include XOM,
Royal Dutch Shell
. Other notable holdings not present in the past include
The top holdings highlight a shift in the fund towards large, integrated energy conglomerates that occurred after its June rebalancing. Furthermore, XOM is twice as large as the rest of the holdings due to its merger with
, which was also a holding in FCG.
Shifting towards integrated oil companies may pose an issue to diehards who have relied on FCG for exposure to companies solely dedicated to natural gas production. However, personally I still see FCG as a reliable alternative to playing the natural gas industry than other options like UNG. In fact, looking at the fund's current breakdown, the fund may hold more promise than ever.
Thanks to the recent bout of economic turmoil and BP's continued struggle to clean up the Gulf of Mexico, many of these successful, high yielding, integrated oil companies have gotten battered, despite seeing stable oil prices and a rebounding natural gas picture.
Their low valuations have helped them fit the criteria for inclusion in the portfolio of FCG and when they at last rebound, FCG will be well suited to take advantage.
FCG's shift highlights the transparent nature of the ETF industry. Although the portfolios of non-traditional indexing strategies can sometimes change, investors can visit a fund's Website and keep tabs on their ETFs' underlying holdings to ensure that they continue to coincide with their personal investing goals.
-- Written by Don Dion in Williamstown, Mass.
Readers Also Like:
At the time of publication, Dion Money Management did not own any of the equities mentioned.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.