A Look Back at Our 2013 ETF Predictions

It is end-of-the-year scorecard review and reflection time. Including paid dividends, the S&P 500is up more than 31% this and has raced to a series of record highs.

In other words, 2013 was very kind to the bulls, but that does not mean anyone batted 1.000. Early this year, I could not resist making some predictions on the major ETF and market trends I see for 2013.

That exercise allowed me to look back at the end of the year to see how right — or wrong — I got things in early January. Let’s look at my personal scorecard for 2013 ETF predictions with an eye toward how these trends could play out next year. [Lydon’s 2013 ETF Outlook]

Dividend investing and ETFs won’t die: This prediction certainly proved accurate. Although yields on 10-year Treasuries spiked this year, pressuring income-generating asset classes and sectors such as real estate investment trusts and utilities, 2013 has been a memorable year for dividend investors.

In October we noted combined assets under management for dividend ETFs have surged to $80 billion this year from $50 billion a year earlier, a total that meant investors had allocated more assets to dividend ETFs than to ETFs holding U.S. Treasuries. [Dividend ETFs: Bigger Than Treasuries]

And amid the smart-beta craze, “dividend weighted- funds once again led Strategic Beta with $27.6bn of flows this year, more than double the $13.1bn collected in 2012. Many income-seeking investors have turned to dividend stocks as bond alternatives in a persistent low-interest rate environment,” noted BlackRock. [ETF Landscape: Smart-Beta Shines]

Most investors are unprepared for rising interest rates: This proved accurate to an extent and judging by the fact that four of the 10 worst ETFs in terms of 2013 outflows are bond funds, there was a lack of readiness for the spike in Treasury by many investors.

Now, the Federal Reserve has made tapering official, investors have a good indication that 10-year yields are unlikely to remain tame for long. Monday’s kiss of 3% was met with aplomb by equities, but some economists see those yields flirting with 3.4% before 2014 is over.

Investors have adapted and have pulled $22 billion from long-duration bond ETFs in the first 11 months of the year while plowing $22 billion into short-duration fare. [Don’t Fear the Fed With These Bond ETFs]