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]
China outperforms: This is one is sort of accurate, although we may, admittedly, be taking some liberties with this assessment. The iShares China Large-Cap ETF (NYSEArca: FXI) is down 3.3% this year, which is a lot better than the Vanguard FTSE Emerging Markets ETF (NYSESArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), though nowhere near the S&P 500.
Funds with substantial allocations to technology and Internet names have been the real winners of the China ETF group in 2013. [This China ETF is Ready to Fly Again]
2013 is the year of the commodity ETF: We right about this one…in the wrong way. The PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC) has now lagged the S&P 500 for five straight years, gold’s bull market ended in staggering fashion and ETFs backed by physical holdings of silver have plunged more than 36%. This will be remembered as a year of infamy for commodities ETFs.
Cyclical sectors outperform: Right on this one. The Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) is battling its health care equivalent to be 2013’s top sector SPDR. The Industrial Select Sector SPDR (NYSEArca: XLI) is now the third-largest sector ETF in the U.S.
Add to that, tech stocks are gradually getting more expensive. These anecdotes could be confirmation that interest rates will keep rising this year because discretionary, industrials and tech are the best-performing sectors in rising rate environments. [Tech Sector P/E Creeps High]
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of EEM.