At the end of 2008, we made some bold predictions about where the exchange traded fund (ETF) industry would wind up in 2009. How did we do? Nine out of 10 ain’t bad! Read on to get the scoop.
1. ETFs will grab more than their fair share of assets. As of mid-December, mutual funds were on a 39-week winning streak of net inflows that stood at a total of $389 billion, which amounts to about 4% of the nearly $11 trillion held in mutual funds. Net inflows for ETFs year-to-date in November stood at $87 billion, 11% of the total assets in ETFs. The mutual fund industry dwarfs the ETF industry, but ETFs can no longer be ignored as a “fringe” investment.
2. Hedge funds implode, and ETFs will explode. As of Dec. 21, 858 hedge funds shut their doors in 2009 while the number of new ones opening has slowed to far below the 1,400-per-year average seen in 2002-2007. As of November 2009, 66 new ETFs launched, but that number could likely be higher by year’s end.
3. All eyes will be on 401(k)s. There’s more attention being paid to this issue than ever before. Thanks to efforts by Darwin Abrahamson’s Invest n’ Retire, ING’s 401k plan ShareBuilder, iShares and others, ETFs are slowly but surely gaining entree into what could be a lucrative market for the industry. Small companies are also readily lining up to offer ETFs as an option in their 401(k)s. [401(k) plans, ETFs and you.]
4. Mutual funds players will realize ETFs are where it’s at. PIMCO has launched several funds [PIMCO getting started with ETFs.], and Schwab has launched its set of ETFs [Schwab’s commission-free ETFs.]. T. Rowe Price, John Hancock and Putnam are gearing up to file ETFs of their own. The holdout remains Fidelity. The mutual fund giant standing firm and has stated that they have no intention of offering more than their single ETF that they currently offer. [Why Fidelity isn’t playing the ETF game.]
5. Commodity ETFs will climb. There’s no other way to put it: assets in commodity ETFs exploded this year. In November 2009, long commodity ETFs had $73.3 billion in assets under management, up 136% since November 2008. Thanks to a global recovery and a weakened dollar, gold, oil and other commodities benefited. [Gold, oil and copper soar.] Commodity ETFs also saw a slew of new launches in 2009, despite some skittishness about potential Commodity Futures Trading Commission (CFTC) position limits in certain funds. [CFTC regulations prompt fee hikes.]
6. In recovery, small-caps and value will see action. Since the market’s March 9 low, value is up 78.5% compared to growth, which is up about 72%. Small-caps have also fared well since the market bottomed out: they’re up about 81% since the low, while large-caps are up 65%. The numbers across the board are good, but it reinforces the notion that in recoveries, small-caps and value tend to lead the way. [Is the time right for small-caps?]
7. Investors will wise up about fees. We called it – fees became more of a battleground than ever. Schwab’s ETFs were launched with commission-free trading at Schwab, and many believe that they won’t be the only ones to do so. Investors are getting smarter about their options and many have discovered that ETFs offer a low-cost, liquid, transparent option for them. [What are ETFs?] Fees are one of the several reasons that investors turned to ETFs this year – after all, the average actively managed mutual fund fee is 1.52%. Investors are beginning to understand the impact a few basis points can have over 30 or 40 years.
8. ETF provider competition will heat up. PIMCO and Schwab both entered the ETF game but that is only the tip of the iceberg. BlackRock bought iShares, Guggenheim bought Claymore, Jefferies Asset Management came out with some funds. Names that weren’t even on the radar a year ago are now players in the ETF industry.
9. ETFs will surpass $1 trillion in assets. In the United States, we were a little off. But at the end of November, global ETF assets stood at a whopping $1.1 trillion. U.S. ETF assets as of November stood at $751 billion – it’s an all-time record for the industry, but it’s not $1 trillion. Yet. [November ETF assets mark more records.]
10. Emerging markets bounce back. Did they ever! Since the market’s March 9 low, emerging markets have rebounded about 100% vs. the S&P 500’s 65% gain in that period. The assets poured in, too: as of November, assets in iShares MSCI Emerging Markets Index (NYSEArca: EEM) were up 94%; assets in Vanguard Emerging Markets Stock (NYSEArca: VWO) are up 54% in the same time frame. [Competition heats up in emerging market space.] ETF providers were quick to come out with new offerings targeting the space: Claymore and Global X have some single-country and China-focused sector funds, while Emerging Global Shares has a growing line of broad sector emerging market funds.
Max Chen contributed to this article.