The Motley Fool:
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, 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. 6 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 5 holdings in the index include well-known large-cap names Exxon at 5.9%, GE at 5.4%, Microsoft at 4%, AT&T at 3%, and Shell 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.
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