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?
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.
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.
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.
Prediction: Lower fed rates boost bond ETFs.
True. This year saw an explosion in the number of fixed-income ETFs offerings: at the start of the year, there were six. So far this year, 41 new ones have hit the market, according to Ray Hendon at Seeking Alpha. The Fed’s rate cuts this year have only helped matters, since some of those ETFs get a boost when rates go down. In addition, fixed-income ETFs have proven to be popular because they offer instant diversification and more transparency.
True. There’s still a long way to go to get ETFs to be a regular aspect of 401(k) plans, as mutual funds still dominate the area, but if you listen closely, you can hear the shift taking place. Some people, like Darwin Abrahamson, the CEO of Invest n Retire, have taken matters into their own hands. Darwin’s proprietary software has made it possible to put ETFs into 401(k)s while keeping costs at a minimum. House Education and Labor Committee Chairman George Miller, D-Calif., has sponsored a bill to get index funds into 401(k) plans. Providers are getting into the market, too: XShares and TD Ameritrade launched their TDAX target-date ETFs this year; WisdomTree launched a 401(k) platform and BenefitStreet and Barclays teamed up to get ETFs to corporate sponsors of 401(k)s.
Prediction: The next big gold rush.
True. The demand for more commodities and natural resources ETFs was there thanks to an increasingly global economy, and that demand has been met. In fact, right at the start of the year, PowerShares wasted no time launching its line of metals, oil and gas ETFs. This year, Van Eck launched the Market Vectors Agribusiness ETF (MOO). And as swiftly as new commodities ETFs were being launched, money was pouring into them. In the first half of the year, $4.174 billion went to commodities, which was a 25% increase in total assets.
True. In 2007, some sectors performed well, while others got clobbered. The volatility made it an especially perfect time for investors to take a closer look at long/short and high beta ETFs to keep the returns coming when those underperforming sectors aren’t generating them on their own. Two of the most volatile markets in 2007 were real estate and financials. By shorting those sectors, you would have done well: the ProShares UltraShort Real Estate (SRS) is up 68.8% since its inception on February 1; the ProShares UltraShort Financials (SKF) is up 49.5% since its inception on February 1.
In November, the top-performing ETFs were UltraShorts. In October and November, ProShares launched a line of ETFs designed to go up when a foreign market goes down. Also in November, Rydex launched a line of leveraged and inverse ETFs. In October, ProShares filed papers with the SEC to launch 48 new ETFs that would provide leveraged, short and inverse-short exposure to commodities and currencies.
Prediction: In the "Truth is Stranger Than Fiction" category…[That is, we’ll see mutual funds folding or merging and existing ones under more pressure to deliver the goods].
True. While mutual funds remain a powerhouse and hold the lion’s share of assets, ETFs continue to draw assets. Net inflows to mutual funds through Oct. 31 were $233.2 billion, and between 2002 and Oct. 31 of this year, assets in mutual funds grew from $3.6 trillion to $8.2 trillion. Investors, however, seem to be getting wise to the fact that mutual fund fees are cutting into their earnings. In that same time period, ETFs grew nearly fivefold, to about $590 billion. As of Oct. 31, year-to-date inflows were $94 billion.
However, a study released in November revealed a growing divide between the haves and have nots of fund providers. The study showed that advisors invest 69 cents of every mutual fund dollar into the top three funds, while the remaining ones are left to fight over the scraps. As new ETFs are launched and make bigger news than new mutual funds, there could be a shift in the coming years.
Looks like in most cases, we were right on. Now, how come we can’t seem to predict the direction of the stock market or election results?
Check back on Thursday, when we’ll make our predictions for 2008!