These Low Volume ETFs Could Thrive in 2013

The case for some low volume ETFs was bolstered a bit on Friday when the the Wall Street Journal examined the debate. As has been previously noted, investors, both professional and retail, have been reluctant to embrace those ETFs with low average daily volume numbers due to perceived liquidity risks. Citing ETF issuer Guggenheim, the Journal only a quarter of the ETFs on the market today trade over 100,000 per shares today. So for every SPDR S&P 500 SPY, PowerShares QQQ QQQ and Vanguard MSCI Emerging Markets ETF VWO, there are a slew of funds seeing paltry volume on a daily basis. Of course, and this point has been previously noted as well, an ETF's volume is not indicative of its ability to generate positive returns for investors. Here is just one prime example: Over the past year, the EGShares India Consumer ETF INCO has surged more than 56 percent. INCO's average daily turnover is just 8,550 shares for the past three months. Not all ETFs, low volume or otherwise, can be INCO in terms of performance, but the following group of lightly traded funds have considerable upside potential for 2013. Market Vectors Russia Small-Cap ETF RSXJ The Market Vectors Russia Small-Cap ETF trades just about 9,500 shares per day, a far cry from the 4.1 million average for its large-cap cousin, the Market Vectors Russia ETF RSX. At this writing late in Friday's trading session, the bid/ask spread on RSXJ was just three cents, according to Bloomberg data, and that was with volume in RSXJ below the daily average. It is possible that is an indication that investors, particularly those that use limit orders, will not be subjective to punitively wide bid/ask spreads with RSXJ. As for why RSXJ can move higher in 2013, there are at least two big reasons. First, Russian stocks are cheap even by their standards of trading at discounts to the broader emerging markets universe. However, at the end of November, RSXJ had a P/E ratio of 3.4 and a price-to-book ratio of just 0.8, making the ETF even less expensive than RSX. Second, the Russian government is taking steps to open its economy in a bid to attract more foreign investment. Should those efforts prove helpful, RSXJ stands to benefit because it offers a less energy heavy approach to Russia than its large-cap counterparts. First Trust US IPO Index Fund FPX Apparently, folks prefer trading individual stock IPOs over an ETF that holds a basket of such stocks because FPX's average daily turnover is just over 6,900 shares. That has not stopped the fund from soaring 30.4 percent in the past year. Investors should note that all not new IPOs, no matter how hot, find their way into FPX. FPX's "index is a rules based value-weighted index measuring the average performance of U.S. IPOs during the first 1000 trading days. Index constituents are selected based on quantitative initial screens," according to First Trust. Home to 100 stocks, including familiar names such as Facebook FB, Michael Kors KORS and Phillips 66 PSX, FPX's volume belies its liquidity. The ETF's top-10 holdings account for about half of the fund's weight and not one of those names has average daily volume below 1 million shares. iShares S&P Global Financials Sector Index Fund IXG If 100,000 shares is the watermark for what is and is not thinly traded, than IXG barely qualifies as the latter with average turnover of almost 96,000 shares per day. If that is enough to assuage volume fanatics, then IXG's lineup should be. The ETF's top-10 lineup includes heavily traded fare such as Bank of America BAC, Citigroup C and Banco Santander SAN, indicating that creating and redeeming shares in this ETF is not a high-risk endeavor. Even when moving further down IXG's 217-stock lineup, it becomes clear that essentially all of the ETF's U.S.-listed issues are heavily traded while the vast majority of the fund's holdings that are listed in foreign markets also see robust turnover. With U.S. banks accounting for just 38.5 percent of IXG's weight, the ETF's ability to repeat or top its 26.5 gain over the past year will come to just how much help the fund gets from its Australian, Japanese and European constituents. A spate of dividend increases and/or share buyback announcements from IXG's Canadian and U.S. money center bank holdings would constructive as well. For more on ETFs, click here.