ETF Trends
ETF Trends

What a year it’s been for the markets. At the end of last year, who could have predicted the changes and turmoil that affected nearly every single person and exchange traded fund (ETFs) in the world? While we breathe a sigh of relief that we’re nearly at the finish line for 2008, let’s look back at the predictions we made and see how we did.

Then we’ll start looking forward to what we hope will be a year full of less pain and more investment opportunities.

1) Global markets will no longer be in sync with the U.S. market, and ETFs are the way to take advantage of global growth.

While domestic markets weren’t as bad as global ones, let’s face it: no one was safe in this downturn. Most global markets were hit harder than the United States was. As of Dec. 9, the S&P 500 was down 39.5%. European markets were down about 47.9%; Asia was down about 46.9% and Latin America was off by 50.8%.

The events of this year show that we’re all linked and interdependent. As the United States slowed down and stopped spending, it created a ripple effect that touched every market in the world – imports slowed, exports dropped off and everyone felt the pain.

2) Actively managed ETFs fail to generate excitement.

Yes. The first actively managed ETF launched in March, but the fund couldn’t have had a worse name attached to it: Bear Stearns. By September, the fund announced it was closing down.

But for other actively managed ETFs that were launched by PowerShares this year, the jury is still out. These funds are in a challenging climate, and while they’re beating or are even with the broader market, most of them are down, so the assets aren’t pouring in at the moment:

  • PowerShares Active Low Duration Fund (PLK): Invests in a portfolio of U.S. government, corporate and agency debt securities. It seeks to outperform the Lehman Brothers 1-3 Year U.S. Treasury Index. The unitary fee will be 0.29%. In the last three months, it’s up 2.8% and has $6 million in assets.
  • PowerShares Active Mega Cap Fund (PMA): Invests primarily in the equity securities of mega-caps. It seeks to outperform the Russell Top 200 Index. The unitary fee will be 0.75%. In the last three months, it’s down 21.5% and has $2 million in assets.
  • PowerShares Active AlphaQ Fund (PQY): Invests in a portfolio of about 50 securities listed on the Nasdaq Global Market. It seeks to outperform the Nasdaq 100 Index, and the unitary fee will be 0.75%. PQY is down 31% year-to-date and has $4 million in assets.
  • PowerShares Active Alpha Multi-Cap Fund (PQZ): Invests in about 50 securities selected according to a methodology developed by AER advisors. It seeks to outperform the S&P 500. Its unitary fee will be 0.75%. It’s down 39% year-to-date and has $6 million in assets.

The PowerShares Active US Real Estate Fund (PSR) launched in November. Look for even more launches in the active space in 2009.

3) ETFs hit $1 trillion in assets.

Nope, not even close. ETFs enjoyed positive asset flow this year, but 2008 is not the year the industry is going to hit the $1 trillion mark. As of November 2008, total assets for U.S.-listed ETFs and exchange traded notes (ETNs) stood at $487.6 billion, a 16.8% decline from November 2007. But ETFs are still experiencing strong inflows: $26.4 billion for November and more than $70 billion year-to-date. Mutual funds have  had more than $400 billion in outflows year-to-date coupled with more than $1 trillion of market depreciation.

ETFs also represent 43% of all equities trading volume in the United States. Launches continued this year as well: there were a total of 843 ETFs and ETNs in existence as of November’s end, compared with 650 a year ago.

4) More ETFs will appear on global exchanges.

True. ETFs managed to continue a popularity surge that left few areas of the world untouched. Some established participants in the ETF marketplace continued to see new offerings, including Europe. In August, the London Stock Exchange saw its biggest launch of new ETFs ever with 19 new funds. Barclays expanded into new markets, such as Brazil, with the launch of three new funds there earlier this month. The Middle East was also a hot spot for new ETFs, with Dubai and Abu Dhabi launching ETFs and other exchange traded products of their own. Ireland also got an index, and it’s soon to be followed by an ETF.

5) Bigger players will enter the market.

True. Most notably, PIMCO, the world’s largest bond fund manager, is gearing up to launch a line of bond ETFs. PIMCO filed for a proposed 1-3 Year Treasury Index Fund, which will trade on the NYSE Arca exchange and follow a Merrill Lynch benchmark. If PIMCO’s example sticks, we could see even more mutual fund providers getting into the ETF space.

6) Commodity ETFs will continue their expansion and gain even more popularity.

True. Let 2008 go down in history as one of the bigger years for commodities. Not only did prices shoot up to historic highs in July, but most of them lost big in the second half of the year. Some, such as oil and gas, lost 70% from their records. New commodity ETFs and ETNs were launched at a blistering pace nearly all year, and they covered strategies and commodities of all types: long, short, leveraged, gold, platinum and other precious metals, coffee, sugar, cotton, livestock, oil and gasoline.

7) Fixed-income assets will grow.

Definitely, but most of that money went to Treasuries. As we write, we’re in the midst of a rush to Treasuries that has driven yields down to lows not seen in 50 years. In fact, government debt is so popular right now that an auction of $30 billion in short-term securities at a 0% yield created so much demand, the government could have sold four times as much. This year has been all about investors looking for security. As of November 2008, there were 52 fixed-income ETFs available, compared with 49 at the start of the year.

8 ) U.S. investors will begin realizing that they can look abroad for their investments.

Not so much. Not that looking abroad was necessarily a bad thing, but this year, investors saw that there were few places for them to go outside of the standard safe havens. Every sector and global region has been hit in this crisis – even traditionally defensive sectors were left reeling.

9) Individual investors will start asking their financial advisors why ETFs aren’t part of their portfolios.

True. Investors are fed up, and it’s showing. We’re seeing a louder call for ETFs in 401(k) plans, as well as a push for better fee disclosure. While the industry is not quite there yet, it’s better off than it was a year ago.

Perhaps one bright spot in this financial crisis is how aware it has made individual investors about their portfolios, and we think that the days of convoluted and high fees and a lack of transparency are over. People are paying attention now. Investors are not only realizing that ETFs are the perfect product to remedy these issues, but they’re going to start demanding them more than ever when the market begins to turn around.

10) An ETF of ETFs will finally hit the U.S. market.

Yes. PowerShares led the way in May of this year, with a line of ETFs of ETFs.

  • PowerShares Autonomic Growth NFA Global Asset Portfolio (PTO): The most growth-oriented of the three funds, with 90% equity and 10% fixed income. $9 million assets.
  • PowerShares Autonomic Balanced Growth NFA Global Asset Portfolio (PAO): Holds 75% equity and 25% fixed income. $8 million assets.
  • PowerShares Autonomic Balanced NFA Global Asset Portfolio (PCA): Holds 60% equity and 40% fixed income. $7 million assets.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.