Early this year, we boldly stepped forward and made our predictions for what we foresaw as the top exchange traded fund (ETF) trends of 2007.
So, how did we do?
Prediction: Global ETFs will continue to outperform their domestic counterparts.
True. As the economy becomes more and more of a global one and the U.S. markets were particularly volatile this year, it’s no surprise that this prediction held true. One of the best-performing international ETFs, the iShares MSCI Brazil Index (EWZ), was up 61.7% year-to-date as of December 17. The iPath MSCI India Index ETN (INP) was up 96.6%, and the iShares FTSE/Xinhua China 25 Index (FXI) was up 44.7%. On the same date, the DIAMONDS Trust, Series 1 (DIA) was up 5.9%; the SPDRs (SPY) was up 2.3% and PowerShares QQQ (QQQQ) was up 15.2%.
In July, Aaron Siegel of InvestmentNews reported that 62% of U.S. consumers do not believe the U.S. will be a world leader in 10 years, and if the current numbers continue to play out, that belief may stick.
Prediction: Actively managed ETFs hit the marketplace with a thud.
False, but not quite true, either. We weren’t exactly wrong, though: they just didn’t hit at all. While we’re closer than we were at this time last year to a true actively managed ETF, they haven’t yet hit the market. PowerShares, Vanguard and Bear Stearns have filed with the Securities and Exchange Commission (SEC) to launch actively managed ETFs, but a big concern remains transparency. But when they do hit, our original prediction holds true: they’ll generate about as much excitement as cold hotcakes.
Prediction: The ranks of ETFs will continue to explode.
True. ETFs continue to attract more interest, more excitement and more money. Their low cost, transparency and ease of use are a huge draw, and ETF providers are springing up to meet the growing demand. At the end of 2006, there were 359 ETFs. By the end of this year, there will be more than 600! And that’s just in the U.S. — worldwide, there are even more.
Prediction: Fidelity finally joins the party.
False. All right, we missed this one. Fidelity does have one ETF, the Nasdaq Composite Index Tracking Fund (ONEQ). But it’s been around since 2003 and since one is the loneliest number, perhaps Fidelity would like to consider giving ONEQ some company. The rumor mill is churning, and maybe this will be the year that Fidelity really commits to cashing in on the ETF trend. If you can’t beat ’em, join ’em, right? However, one can see how Fidelity isn’t exactly highly motivated to launch a lot of ETFs right now: the revenue stream to the mutual fund companies and providers is much bigger with mutual funds than it is with ETFs, and mutual funds still make up the bulk of 401(k) plans. Offering more ETFs would only cut into their bottom line.
Prediction: The emergence of emerging markets.
True. And how! Anything BRIC-related was especially hot: The Claymore/BNY BRIC (EEB) is up 54.1% this year; the iShares MSCI Brazil Index (EWZ) is up 61.7%; the iPath MSCI India (INP) is up 96.6%. But they weren’t the only emerging markets ETFs that shined brightly this year. Vanguard’s Emerging Markets Stock ETF (VWO) is up 29.6% year to date, iShares MSCI Emerging Markets (EEM) is up 25.7%. Some of the emerging markets even inched closer to "emerged" status (as defined by FTSE): Israel will be deemed "developed" by June 2008, Taiwan and South Korea are on the verge of a promotion and China could be promoted if it removes its restrictions on foreign investment.