ETF Trends
ETF Trends

Last week, we weighed in with our exchange traded fund (ETF) industry predictions for the coming year. It’s always interesting to get other views on where the markets are headed, though, and Chuck Jaffe has some interesting thoughts of his own.

No matter how the stock and bond markets fare this new year, the mutual fund industry and its investors, are likely to experience a bad year, predicts Chuck Jaffe for MarketWatch. In the 15 years of market commentary, Jaffe has been  right about his forecasts 75% of the time.[High mutual fund fees are a boon for ETFs.]

He expects the following to occur in  2010:

  • Money-market fund closures. Fund firms will have to shut down money-market funds if interest rates stay the same, since there is just no room for profits anymore. Fee waivers have kept money funds profitable, but are costing fund firms millions in the meantime.
  • Funds failing. If rates rise quickly enough, corporations and large investors could dump money-market funds in favor of commercial paper that have a better rate.
  • Bonds market. When rates eventually rise, bond fund prices drop and bond fund investors take a hit. Those investors won’t just stay idly by and suffer through the bond readjustments.
  • Commodities, real-return and absolute-return funds. Fund firms have always jumped on a hot area of the market with vigor. However, once fund firms seek out the next hot spot, the former “it” investment style is left behind. It may be what will occur with commodities, real return and absolute return funds in 2010.
  • Target-date funds. Target-date funds in retirement plans are mostly run by big fund companies. In 2010, Jaffe believes smaller players will leave the target-date business, which would diminish innovation and evolution of these funds, and consumers would be stuck with average products. [Target-date ETFs keep it simple.]
  • “What’s next” for ETFs. Some big investment firms want in on the ETF market in 2010. If they are able to squeeze into the market, competition and innovation will likely evolve the ETF market. However, if they find the top fund providers have already captured all the market share, the ETF market may not evolve as quickly, says Jaffe.
  • SEC and 12b-1 fees. The Securities and Exchange Commission (SEC) are not fond of 12b-1 fees. Regulators have been huffing and puffing, but nothing has happened. Jaffe doesn’t think anything will happen this year, either. [What are 12b-1 fees?]
  • Investors. Observers expect the market to normalize, with equity gains between 6% to 10%. Investors, on the other hand, are greedy and want more. Some investors will try and capture more returns through leveraged ETFs, without knowing the risks involved, writes Jaffe.
  • Summary prospectus. The summary prospectus is a short document that allows investors a glance at a fund’s inner mechanics. It’s likely to be the fund description of choice new year. Still, people likely won’t pay any more attention to the shorter prospectus than they do to the longer ones.

For more information on mutual funds, visit our mutual fund category.

Max Chen contributed to this article.

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.