I first learned about the “new fund effect” about ten years ago in Gary Smith’s book “How I Trade for a Living”. The idea is to buy a new promising mutual fund as soon as it becomes available. Many new funds tend to outperform the overall market and their peer group during the first few months of their existence.
There are several reasons for the new fund effect that apply to actively managed funds:
- New funds have fewer assets, allowing managers to use their best ideas.
- New fund managers don’t have to make sell decisions.
- New funds tend to concentrate their holdings the first few months in a limited number of stocks.
Over the last year, I bought two new bond mutual funds (TCFIX, FOCIX) that have performed fairly well. But new equity funds have the potential for higher performance than bond funds.
A recently issued ETF that may be benefit from a variation on the new fund effect is the Emerging Market Consumer Titans ETF (ticker: ECON). This is a new ETF which is based on the Dow Jones Emerging Markets Consumer Titans Index of 30 leading consumer goods and consumer service companies in various emerging market countries around the world. It does not benefit from portfolio decisions of an active manager. But I believe there may be an edge to owning this fund if it continues gaining in popularity. As more assets flow into the ETF, new ETF shares are created which leads to more buying of the 30 stocks in the index.
ECON is well diversified. The country weightings as of Sept. 30, 2010 are:
- Mexico 18.7%
- Brazil 15.5%
- South Africa 13.8%
- India 11.3%
- China 8.8%
- Malaysia 8.4%
- Indonesia 5.7%
- Russia 5.2%
- Chile 2.2%
ECON was issued on Sept. 14 and has already appreciated about 12%. Assets have grown to over $60 million, but that is still relatively low, and there is room for this to grow much higher. I’ve been hearing ads regularly on Bloomberg radio promoting the ECON ETF, and it seems to be in a sweet spot right now, since it is attractive to investors who want exposure to the emerging markets in less risky consumer based companies.
ECON trades with a fairly high bid-asked spread of four to five cents, so it is not recommended for very active traders. But it could do quite well for longer term investors.
Full Disclosure: Long ECON.