As the ETF industry has continued its rapid expansion, there has been much debate surrounding the sustainability of the current growth and the potential saturation of the market. The first ETFs were relatively simple products, offering exposure to the world’s most widely-followed equity benchmarks. But the last ten years have seen hundreds of new ETFs hit the market that go far beyond “plain vanilla.” Leveraged ETFs, intelligent indexing, exchange-traded commodities, and actively-managed funds are just a few of the innovations the industry has seen.
Some believe that the ETF industry has gone into “absolute overdrive.” Others think that any reports of an ETF issuance bubble have been greatly exaggerated. While there are some valid points made on both sides, it is perhaps best to let the numbers decide. According to the latest data from the National Stock Exchange, more than 120 exchange-traded products have been launched this year, covering a wide variety of asset classes, geographies, and investment styles. These funds have seen aggregate cash inflows this year of more than $7.3 billion and have total assets of more than $7.7 billion. Several of these funds have not received the welcome that their issuers had expected, achieving less than $10 million in aggregate assets. But others have been tremendously popular, raking in hundreds of millions of dollars as investors embraced both innovative funds and those that offer a slight tweak to existing products.
The ten most successful ETFs of 2009, as judged by total cash inflows for the year, include:
10. SPDR Barclays Capital Convertible Bond ETF (CWB)
The bond ETF space has seen continued development in 2009, with the introduction of dozens of new funds offering exposure to previously unavailable corners of this asset class. CWB is one such innovation, the first fund offering exposure to debt securities that may be converted to equities (see CWB’s holdings here).
CWB took in $171 million between its launch in April and the end of November, proving that there is an appetite among investors for exposure to convertible bonds.
9. ProShares UltraPro Short S&P 500 (SPXU)
After tumbling in 2008, most domestic equity benchmarks, including the S&P 500, staged impressive recoveries in 2009. But there was no shortage of investors anxious to bet against the S&P (at least in the short-term), as this ProShares fund brought in $224 million since its launch in June.
SPXU seeks to deliver daily results that correspond to three times the inverse of the daily performance on the S&P. ProShares’ UltraShort S&P 500 (SDS), which is designed to deliver 200% daily leverage, also enjoyed a stellar 2009, with more than $3 billion in cash flows through November.
8. PIMCO 1-3 Year Treasury (TUZ)
One of the most important events in the ETF industry this years was PIMCO’s entrance into the space. The world’s largest bond manager launched its short-term Treasury ETF in June amidst much fanfare. Despite competing directly with the iShares Barclays 1-3 Year Treasury Bond Fund (SHY), TUZ has been a huge success so far, bringing in almost $250 million in its first six months (see TUZ’s performance charts here).
While PIMCO’s first fund has been its most successful, the other eight ETFs launched by the bond giant this year have been well received by investors as well, and the company now has total ETF assets of about $450 million.
7. Direxion Daily Real Estate 3x Bull Shares (DRN)
Despite dismal performance over the last several years, real estate remains a popular asset class for short-term investors. Since its inception in July, DRN, which is designed to deliver daily returns equal to three times the results of the MSCI U.S. REIT Index, has brought in more than $200 million. DRN’s bear counterpart, DRV, has taken in about $61 million since its launch.
6. ETF Securities Physical Swiss Gold Shares (SGOL)
Gold’s remarkable rise (and recent pullback) has been one of the major stories of the second half of this year. The gold ETF space has long been dominated by the SPDR Gold Trust (GLD), but London-based ETF Securities, which launched the world’s first gold fund in Australia in 2003, has had some early success in gaining market share. Since its inception in September, SGOL has seen cash inflows of $258 million (see SGOL’s fundamentals here).
The other fund brought to market by ETF Securities has been no slouch either: the ETFS Silver Trust (SIVR) has seen inflows of $144 million since being launched in July.
5. Vanguard FTSE All-World ex-U.S. Small Cap (VSS)
The last year has seen the home country bias exhibited by many U.S. investors begin to fade, and allocations from domestic stocks to international ones have become more and more common. Vanguard’s small cap ex-U.S. fund offers exposure to more than 2,000 stocks in 40 countries, making it a key component of any portfolio designed to minimize exposure to the U.S. Since its launch in April, VSS has seen cash inflows of more than $300 million.
4. JP Morgan Alerian MLP ETN (AMJ)
One of the year’s most successful new ETFs may not be recognized my many investors. AMJ is an ETN linked to the Alerian MLP Index, a benchmark designed to track the performance of the energy MLP sector. MLPs, or master limited partnerships, are publicly-traded limited partnerships, the majority of which operate in the energy infrastructure industry. Many MLPs own assets such as pipelines that transport crude oil, natural gas, and other refined petroleum products. Because they generate fee-based revenues, the prices of MLPs may not be directly tied to commodity prices (see AMJ’s technicals here).
With $303 million in cash inflows and assets approaching a half billion, AMJ has been a huge success for JP Morgan.
3. Market Vectors Brazil Small Cap (BRF)
BRF has been one of the most impressive ETFs of 2009 in several regards. Since its launch in May, BRF has gained more than 100%, making it one of the year’s top gainers (see the Top Ten Performing Equity ETFs of 2009, and sign up for our free ETF newsletter for more updates on the top-performing funds). BRF has outgained the iShares MSCI Brazil Index Fund (EWZ) by a wide margin since its launch, reinforcing the idea that there is a lot more to international equity exposure than the mega cap stocks that dominate most international ETFs. BRF has seen more than $400 million of cash inflows since launch, more than all but two other funds this year.
Van Eck is planning to launch a Latin America Small-Cap ETF, perhaps in 2010, no doubt hoping to repeat the success of BRF.
2. Market Vectors Junior Gold Miners ETF (GDXJ)
Entering December, GDXJ had $487 million in assets, a modest total in the ETF industry. But GDXJ was less than a month old then, making it’s rise to nearly a half billion dollars in assets perhaps the quickest ever. This ETF invests in equities of small and mid cap companies engaged in the development of new sources of gold either through greenfields exploration or the use of new geological models to search for gold in overlooked and abandoned areas (see GDXJ’s fact sheet here).
The Market Vectors Gold Miners ETF (GDX), which invests in more established gold miners and is tilted towards large cap stocks, has taken in more than $1 billion, growing to become one of the 25 largest U.S.-listed ETFs.
1. iPath S&P 500 VIX Short-Term Futures ETN (VXX)
The CBOE Volatility Index, better known as the VIX, is one of the most widely-followed indexes in the world. The “fear index” measures the implied volatility on S&P 500 index options, reflecting the market’s expectations for level of fluctuations in the market over the coming month.
Although the VIX has been around for nearly two decades, the ability to invest in this benchmark is a relatively new development. VIX futures were introduced in 2004, and options on the index followed two years later. In January 2009, iPath introduced two VIX ETFs, including VXX and the S&P 500 VIX Mid-Term Futures ETN (VXZ). Through November, VXX had seen cash inflows of nearly $1 billion, while VXZ had taken in only about $72 million. Unfortunately for investors, VXX was one of the year’s worst performers, losing almost 70%.
Breaking Down The Results
A look through the most successful new ETFs of 2009 reveals a number of interesting trends. First, the list includes leveraged ETFs from both ProShares and Direxion (and several more just missed the cut). Leveraged ETFs faced a number of obstacles in 2009 — frivolous lawsuits, “bans” at major brokerages, and more stringent regulatory requirements just to name a few — but these funds clearly remain extremely popular among investors with an appetite for risk and an active trading style. In total, ProShares and Direxion took in more than $14 billion through the first 11 months of the year.
It’s also interesting to note that two relatively “plain vanilla” products, SGOL and TUZ, made the list. In a year that saw the introduction of increasingly complex and targeted ETFs, two of the simpler launches achieved the most success, despite going head-to-head with established ETFs offered by some of the industry’s biggest players.
As these ten funds proved in 2009, there is still plenty of room for expansion in the ETF industry, as investors continue to embrace innovative products that offer new angles of exposure or satisfy a need in their portfolio. Expect the fund launches to continue throughout 2010, and for a handful of ETFs to hit it big right out of the gate.
Disclosure: No positions at time of writing.
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