Evening Out Risk in Your Investments

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to manage the volatility of the stocks in your portfolio but don't have the time or expertise to hand-pick your holdings, the VelocityShares Equal Risk Weighted Large Cap ETF  (NASDAQ: ERW  ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously. It includes the S&P 500 holdings, weighted by their riskiness, so that each contributes an equal amount of risk.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The VelocityShares ETF's expense ratio -- its annual fee -- is 0.65%. The fund is very small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF is too young to have a sufficient track record to assess. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why equal weight?
Unbeknownst to us, many indexes are structured sub-optimally. The venerable Dow, for example, simply averages the stock prices of its 30 components. The S&P 500 and many others simply weight their holdings by market cap, so that bigger companies hold more sway. Others do things differently, such as this ETF, with its aim of evening out the riskiness (and volatility) of its holdings.

More than a handful of this ETF's top holdings had strong performances over the past year. Natural gas specialist Spectra Energy (NYSE: SE  ) surged 26%, and recently yielded 3.4%. Spectra has been challenged by low natural gas prices, an oversupply, and few rigs, but as those factors turn around, its business should pick up. Meanwhile, the company has been inking some promising partnerships. Along with NextEra Energy, it has been awarded a contract to build a $3 billion natural-gas pipeline into Florida. It's also angling to boost dividend payouts via a reorganization. The company recently moved many miles of pipeline to its master limited partnership, Spectra Energy Partners. 

BMC Software (NASDAQ: BMC  ) gained 18% over the past year, with shareholders approving a $6.9 billion take-private bid by a Bain Capital-led consortium of private equity buyers. Some have been disenchanted with the company, due to shrinking profit margins and sluggish growth, along with concerns over its competitive strength. Why are private-equity firms interested? Well, they can load up the companies with debt, profit off the company, and then often relaunch it on the stock market, as a new stock carrying a heavy debt burden. This is often how it works.

Other companies didn't do quite as well over the last year, but could see their fortunes change in the coming years. Intuitive Surgical (NASDAQ: ISRG  ) sank 20%, with the robotic surgical equipment leader experiencing a bumpy year. Causing the bumps were bearish comments from a research company, questions about the efficacy of its systems, and a warning letter from the FDA. Some legal worries were eased recently, though, with a victory in court, but some reasonably wonder whether the company's growth prospects are slowing down. The company's competitive advantages and dominance in its promising market give it significant potential, but not without risk. Intuitive recently roughly doubled its share buyback plans.

Edwards Lifesciences (NYSE: EW  ) shed 18%, much of that happening in April, when the heart-valve maker posted disappointing earnings results for its first quarter and lowered its guidance. It has disappointed before, and also has to contend with some cranky workers. Its second quarter was different, though, exceeding expectations on solid sales of its Sapien valve. It gained approval in Japan, as well.

The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

This isn't the only ETF that should pique your interest. You can learn more about a few ETFs that have great promise for delivering profits to shareholders by checking out The Motley Fool's special free report, "3 ETFs Set to Soar." Just click here to access it now.


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