5) The emergence of emerging markets.
Emerging market ETFs will expand into even more individual countries. Right now, most international ETFs represent established foreign indexes, but the big boys are moving into the developing markets, as well. Barclay’s and State Street are looking into more individual country offerings. And, there’s plenty more on the docket for China—possibly including mid-cap and small-cap exposure to capture the awakened giant. Get ready for India, Turkey, Russia and Eastern Europe to come on board with increased and improved individual offerings.
6) Lower fed rates boost bond ETFs.
The expanding U.S. economy has been giving us some sign of slowdown. The housing situation, in particular, has many wondering if the Fed may contemplate lower rates in 2007. Such a move will give bond ETFs the impetus to move upward. Fixed income investors can use bond ETFs to capitalize on a lower interest rate environment. Certain fixed-income ETFs are influenced by interest rate movement. In fact, they respond inversely to interest rates. As such, when rates increase these bond instruments will actually go down in value. Conversely, when rates decline, the value of the ETFs will go up—regardless of treasury or corporate bonds.
7) ETFs get ready for retirement.
Get ready for the billion dollar struggle! Corporate America and their employees want ETF offerings for 401(k) plans. The expenses associated with 401(k) plans are exorbitant—just the way the fund providers like them. But, administrators have seen the ETF light, and they want more—and they’re likely to get what they want. The large providers won’t deliver easily—they have plenty to protect—and they’re just not motivated to give up the big fees. But, some of the usual ETF suspects are poised to enter the fray, setting in motion a wonderful power play in which the corporate sponsors and the employees will come out on top. The cost-savings potential is a great motivator for the battle to demand ETF inclusion in 401(k) plans.
8) The next big gold rush.
More specialized commodity ETFs are on their way. There’s enormous pent-up demand for an increased selection of commodities and natural resources ETFs. The new offerings in this arena will make it even easier for investors to participate. Tradable gold products—including gold trusts and gold bullion—are on the list of expanded offerings. And, an increased supply of oil, metals, currency, energy and water will make investments in commodities sector more mainstream for investors. Big players have given us some very credible benchmarks for smart commodities and natural resources investing. And even CalPERS—the world’s largest pension fund—has moved into commodities ETFs. What’s more? We’re seeing even more specialized sectors move into the arena, as well. Can you say "nanotechnology"? ETF investors can learn all about it.
9) Bear-market ETFs.
The Bull has taken Wall Street by storm for the last four years running. Every savvy investor knows that the streak is long in the tooth now. This is a good time to learn about the increased offerings for long/short and high beta ETFs that pack large asset class exposure with less money—leverage. We all love a bull market, but you can learn to love a bear, too. ProFunds has some great institutional offerings that run inverse to the market. Keep a close eye on what other ETF providers are offering in regards to long/short and high beta ETFs.
10) And in the "Truth Is Stranger Than Fiction" category…
The big mutual funds boom of the 1990s had fund providers throwing everything—including the kitchen sink—into new funds. Adding some 400–500 new funds a year, they all got sloppy. Complacent active managers, earning fat paychecks and underperforming simple benchmarks, finally got under the skin of investors who learned too late they were paying too much to earn too little. Predictably, we see hundreds of active funds folding or merging to bury the putrid track records. Those who remain standing—for now—are scared. They know they are under the microscope to deliver. Ironically, guess how they’re attempting to keep their fat out of the fire: they are buying up ETFs to bolster their abilities to get closer to the benchmark. Maybe 2007 will be the year active mutual fund shareholders learn the virtues of ETFs. Amazingly, that epiphany may come at the hands of the active managers themselves.
Yes, indeed, 2007 is going to be another big year for ETFs. This new year promises continued refinements for our favorite investment tool. Innovative, new breeds of funds will continue to sharpen investors’ abilities to capture the markets that matter. New fund issues, new opportunities and new markets: it’s going to be a very happy new year!