We did pretty well with our exchange traded fund (ETF) predictions for 2009, with nine out of 10 of our forecasts proving to be spot-on. Can we replicate our success again in 2010? Read on!
1. There will be more actively managed ETFs, and most will land with a thud. This isn’t because actively managed ETFs have no use for investors – on the contrary. These funds offer investors the benefit of an experience active manager, alongside the other benefits ETFs offer, including transparency, low cost and intraday liquidity. But providers can’t launch these funds and expect the assets to roll in overnight. Investors will be watching these funds closely to see how they do first, then proceed accordingly. [Active ETFs lure big names.]
2. ETF assets under management in the United States will hit $1 trillion. The ETF industry came pretty close this year, and assets are already at record levels, standing at $751 billion at the end of November. If 2010 is another banner year for the industry, surpassing the $1 trillion mark should be an easy feat. Industry analysts feel similarly, noting that as traditional fund providers like T. Rowe Price enter the space and give the industry more heft, even the most skeptical investors could be persuaded to put their money in ETFs, reports Luisa Beltran for Ignites. [November a record-breaking month.]
3. The 1,000th ETF will launch to much fanfare. The ETF industry is close here, too: At the end of November, there were 819 ETFs. In the last few months of 2009, the ETF industry suddenly saw a flood of new funds launch. But a few have closed, too. Can ETFs keep up the pace heading into the new year? [New ETFs in 2009.]
4. Fidelity will finally crack and make a commitment to ETFs. In 2009, more than 2,000 mutual funds closed their doors and the industry overall suffered outflows. Fidelity stated earlier in 2009 that it had no intention of getting on board with ETFs, beyond the lone fund it does offer – the Fidelity Nasdaq Composite Index Tracking (NASDAQ: ONEQ) – but how long can the fund company really hold its ground? With huge names like PIMCO, Schwab, Jefferies, Guggenheim, T. Rowe Price, BlackRock and Goldman Sachs making moves into the ETF space, Fidelity is going to have an increasingly hard time resisting the lure. The thing is, mutual funds and ETFs don’t have to be enemies. Many providers who also have mutual fund offerings have stated as much: they see ETFs as a natural supplement to what they already do. Hopefully, Fidelity will see the light and begin branching out soon, too. [Why Fidelity isn’t playing along.]
5. The Commodity Futures Trading Commission (CFTC) will back down a little. The CFTC launched an investigation into futures-based commodity funds and is currently toying with the idea of position limits that could impact a number of extremely popular ETFs. After a review of these funds, however, we predict that the CFTC will step back and realize that futures-based commodity ETFs are truly an efficient way for investors to get exposure to commodities such as gold, corn, wheat, oil and natural gas. The CFTC will allow the natural physics of supply and demand to dictate the use of futures in ETFs. [Commodity ETFs brace for regulations.]
6. Schwab will launch an ETF supermarket. Schwab pioneered the idea of the mutual fund marketplace in 1984, giving investors an easy and economical way to invest in mutual funds. In 1992, Schwab launched the industry’s first no-load, no-transaction-fee mutual fund supermarket, which pulled in $8 billion in its first year. We predict that Schwab will do the same thing for ETFs in an effort to become a bigger player in the space. Its mutual fund marketplace is a successful idea it may want to replicate. [Schwab’s ETFs could open doors.]
7. The Federal Reserve’s interest rate hike will catch fixed-income ETF investors by surprise. Interest rates are now at record lows. While Federal Reserve Chairman Ben Bernanke has stated that the central bank intends to keep rates low for sometime in order to stoke economic growth, what goes down must eventually come back up. And when rates do go up, long-term bond ETF holders could be surprised. [Do bond ETFs work as they should?]
8. Global ETF offerings will expand. This year, it became more clear than ever: For an investor to see real portfolio performance, there needs to be some serious international allocation. Two-thirds of the world’s market cap is outside of the United States. That’s a number investors can’t afford to ignore. Fortunately, it doesn’t seem as though they are: As of November 2009, net inflows into long-only international ETFs stood at $29 billion; in November 2008, that number was $9 billion. ETF providers will take notice of the increasing international interest and launch new ETFs accordingly. [6 things you’re missing by not investing globally.]
9. We’ll see more creative uses of ETFs: life cycle funds, ETFs of ETFs, separately managed accounts. Many of the major ETF asset classes and sectors have been covered: micro-cap on up to mega-cap, technology, real estate, consumers, financial, just to name a few. Since the basic portfolio building blocks are now in place, look for providers to begin using existing ETFs in more creative ways: life cycle funds for those thinking about retirement, more funds-of-funds and ETFs being employed in separately managed accounts. [New ETFs that launched this year.]
10. Emerging market ETFs will be at the top of the performance charts for 2010. Globally-focused ETFs, especially those aimed at emerging markets, caught on fire this year. Some of the top-performing funds of 2009 include ETFs tracking Russia, Brazil, India, Latin America, Turkey and China. As the global economic recovery continues, developed markets will begin to spend more, emerging markets will see their own internal consumption grow and we’ll experience a mutually beneficial relationship that could put these countries at the top again in 2010. [Finding rewards in emerging markets.]