Invention Investing

Invention investing sounds like something Wall Street does all the time, often for its own benefit. A new ETF, the Claymore/Ocean Tomo Patent ETF (AMEX: OTP), now gives individuals an opportunity to invest in companies with valuable intellectual property, a sign of their inventiveness. Look at a company like Apple, and investing in creative companies starts to seem like a good idea.

OTP has a fairly moderate expense ratio of 0.60% and follows the Ocean Tomo Patent Index, an index of companies that have valuable patents. Ocean Tomo owns a patent-rating system that estimates the values of more than 4 million U.S. patents. The basis for the fund is the idea that patents are a sign of a company's creativity. In an age when knowledge is a key component of value, patents can be a proxy for a company's inventiveness and worth.

The index is made up of 300 stocks from large, mid-sized, and small-cap universes, with low price-to-earnings ratios. Six companies in each of 50 groups of companies are added to the index, organized according to size and investment style. Most importantly, these stocks also have valuable patents. The top five holdings in the index include well-known large-cap names Exxon (NYSE: XOM) at 5.9%, GE (NYSE: GE) at 5.4%, Microsoft (Nasdaq: MSFT) at 4%, AT&T (NYSE: T) at 3%, and Shell (NYSE: RDS-A) at 3%.

OTP's returns look appealing, based on back-tested data. A hypothetical investment over the past 10 years in the patent index, ending November 2006, outperformed the S&P 500 by an average of 300 basis points a year. Of course, real money wasn't invested, and this may be no indication of future performance.

OTP has a solid foundation in the unique and broadly diversified index that it tracks. Inventions that add value to a company are usually the result of hard work over a long period of time. Investing in those companies willing to fund creativity over many years could prove to be a good investment strategy.

Microsoft is a Motley Fool Inside Value pick. To find out why, you can take a 30-day free trial of the newsletter. AT&T is a former Stock Advisor selection.

Fool contributor Zoe Van Schyndel lives in Miami and enjoys the sunshine and variety of the Magic City. She does not own shares in any of the funds or companies mentioned in this article. The Motley Fool has a disclosure policy.