Last year saw more than 100 new product launches, ranging from plain vanilla equity and bond funds to ETFs offering exposure to exotic new investment strategies and asset classes previously available only to a limited slice of the investing community. The innovation that has made ETFs a popular alternative to mutual funds seems ready to continue through2010. Based on discussions with industry executives and others covering the industry, it seems like a safe bet that 2010 will shatter existing records for new ETF launches.
But there has also been some concern over saturation in the ETF industry, as well more than 100 funds currently have less than $10 million in assets. Hype around the launch of new products doesn’t always translate into sustained investor demand. While many investors and advisors are looking forward to some of the exciting products in the pipeline for 2010, we take a look back, checking in on ten of the most interesting ETFs launched in 2009 (we should note the the numbers don’t reflect a ranking of any sort).
10. Grail American Beacon Large Cap Value ETF (GVT)
When Grail Advisors announced the launch of GVT last year, many investors (including ETF Database) predicted that the fund would be a gamechanger. GVT wasn’t the first actively-managed ETF–PowerShares launched a line of active funds in 2008–but it was the first to allow fund managers complete discretion in selecting holdings, blurring the lines between ETFs and traditional mutual funds.
GVT’s performance has been fine–it has outperformed the iShares Russell 1000 Index Fund (IWB) since its inception–but the fund has struggled to gain traction among investors, finishing 2009 with just $3 million in assets. GVT’s expense ratio (0.79%) has been tough for many investors to swallow, especially without a long track record.
9. PIMCO’s Active Bond ETFs
Despite the market’s tepid reception to actively-managed equity ETFs, expectations for active bond funds from PIMCO were exceptionally high. After launching a handful of traditional passively-indexed Treasury ETFs over the summer, the bond fund giant debuted its Enhanced Short Maturity Strategy Fund (MINT) and Intermediate Municipal Bond Strategy Fund (MUNI) in November.
Backed by PIMCO’s impressive track record and reputation in the bond arena, MINT and MUNI have been big successes, as investors have so far been happy to fork over a few extra basis points–both charge expense ratios of 0.35%–for the firm’s bond expertise. MINT and MUNI closed the year with $108 million and $13 million, respectively, and PIMCO added a third active bond fund (SMMU) in January.
8. State-Specific ETFs
The introduction of the first state-specific ETFs made headlines late last year when Geary Advisors launched the Texas Large Companies Exchange-Traded Fund (TXF) and Oklahoma ETF (OOK), and then slashed the expense ratio of the funds to 0.20%. The launches caught the eye of investors not only because of the unique focus of the products, but also because of the impressive historical performance of the underlying indexes.
OOK and TXF are still very young funds, but so far they’ve hit their mark. Through January, OOK was up more than 5% since its launch, and has outpaced the S&P 500 SPDR (SPY) and energy SPDR (XLE) by about 3% and 10%, respectively. “At first, people outside Oklahoma and Texas have been skeptical, because the concept of a state-specific ETF comes across as gimmicky,” said Keith Geary, president and CEO of Geary Advisors in an interview with ETF Database. “But that all changes when they hear about the rationale behind the products and see the historical performance figures relative to the S&P 500.”
7. ETF Securities Silver & Gold ETFs
ETF Securities is one of the largest European ETF issuers and has an impressive track record of product innovation across the pond, so the firm’s entrance into the U.S. market was of great interest to both investors and competing issuers. Sticking to what it knows best, ETFS launched the ETFS Silver Trust (SIVR) in July and followed with the Physical Swiss Gold Shares (SGOL) later last year.
Despite competing directly with two of the largest exchange-traded commodity products, the silver and gold funds from ETFS have done quite well, finishing 2009 with assets of $130 million and $334 million, respectively. And the issuer has already completed one of the most successful new product launches of 2010, introducing the first physically-backed platinum and palladium ETFs.
6. iPath’s VIX ETFs
When iPath introduced the S&P 500 VIX Short-Term Futures ETN (VXX) and VIX Mid-Term Futures ETN (VXZ) in early 2009, investors got access to an asset class that had never before been easily accessible. VIX futures, which are commonly used as protection against market turmoil, proved to be quite popular, taking in more than $1 billion in cash inflows during the year.
Unfortunately for these investors, VXX was one of the year’s worst-performing ETFs, plummeting as expected market volatility retreated from all-time highs to the long-term average. Most investors understand the nuances of a futures-based strategy, but some have been frustrated that neither ETN has closely tracked the spot level of the VIX: VXX has done far worse while VXZ has fared much better.
5. Sector-Specific Emerging Market ETFs
Last year was undoubtedly the year of the emerging markets, as the world’s developing economies raced ahead of the U.S. and Europe to take the lead in the global recovery effort. Prior to 2009, investors had access to almost every corner of the globe through ETFs, but their ability to gain targeted exposure was minimal, as most funds tracked broad market benchmarks.
Emerging Global Advisors launched three ETFs targeting the metals and mining (EMT), energy (EEO), and financial (EFN) sectors of emerging markets last year, and the funds seem to be gaining traction with investors. EGA’s assets grew by 30% month-over-month in January to more than $60 million despite a down month for emerging stock markets. It looks like we can expect more new products from EGA, as the company has filed for several more sector-specific funds as well as mid cap ETFs targeting specific economies (see our emerging markets ETF center for more some interesting reading on various ETF options).
4. Sector-Specific China ETFs
Following in the path blazed by EGA, Global X Funds introduced a line of ETFs focusing on specific sectors within the Chinese economy last year. “Historically, investing in [China] was an ‘all or nothing’ game,” said Global X CEO Bruno del Ama in an interview with ETF Database. “Investors weren’t able to easily access, for example, the Chinese industrials sector without also getting exposure to financials and energy companies. So we are setting out to expand the tools available to investors by giving them different ways to play China.”
So far, investors have embraced these tools and the opportunity to establish increasingly granular exposure to the world’s fastest-growing economy, as Global X assets climbed to $85 million at the end of 2009. Currently, Global X offers funds focusing on the technology (CHIB), energy (CHIE), financials (CHIX), consumer (CHIQ), industrials (CHII), and materials (CHIM) sectors.
Recent speculation over tightening monetary policy in China has highlighted the country’s increasingly important role in the broader global economy. The market outlook may be uncertain, but look for targeted China ETFs to continue their surge in popularity in 2010.
3. MacroShares Housing Up & Down Funds
After shuttering two versions of paired oil ETFs, MacroShares launched its Major Metro Housing Up (UMM) and Major Metro Housing Down (DMM) to a somewhat skeptical market in 2009. These products offered exposure to residential home prices through an innovative “zero sum” mechanism–the two funds essentially pledged assets to each other over time depending on the value of the underlying benchmark.
Unfortunately, the third round of MacroShares funds didn’t make it to the end of the year, as the company pulled the plug after failing to accumulate sufficient assets. It’s entirely possible that the ETF industry will come to regard MacroShares funds as ahead of their time, and seems a shame that the company didn’t give the funds longer to catch on or implement a more carefully planned marketing effort.
There were definitely some issues with the paired fund structure, and further refinements are needed. But the set-up of the MacroShares products was also a potentially superior way to offer investors exposure to commodity prices and could be extended to allow hedging or speculation on a number of metrics, such as inflation and unemployment. Whether a new issuer steps up to finish what MacroShares began remains to be seen.
2. Hedge Fund ETFs From IndexIQ
When IndexIQ launched the first hedge fund ETF in March of last year, investors were a bit skeptical that the IQ Hedge Multi-Strategy Tracker ETF (QAI) could actually replicate the returns available to investors in hedge funds. But QAI gathered momentum (and assets) throughout the year, recently topping the $80 million mark.
Encouraged by this “proof of concept” IndexIQ has followed on with several more alternative index ETFs since, including the Merger Arbitrage ETF (MNA), Global Resources ETF (GRES), and CPI Inflation Hedged ETF (CPI). See a complete list of hedge fund ETFs here.
1. Small Cap International ETFs
As dozens of international ETFs have popped up in recent years, investors have boasted that exposure to almost any economy in the world is available through ETFs. But this array of opportunities has, for the most part, been an illusion. The majority of international ETFs are dominated by holdings in mega-cap companies that generate significant portions of revenue from overseas markets.
Van Eck’s Brazil Small Cap ETF (BRF), which debuted last year, has been a home run in terms of both performance and popularity with investors. BRF took in more than $500 million on the year, and added more than 100% between inception and year end. Investors have been quick to grasp the difference in risk profiles between small caps and large caps (see this feature for a complete breakdown), and many have found a use for BRF in their portfolio. Van Eck is now planning a Latin America Small Cap ETF that could hit the market in 2010.
There have certainly been a few airballs along the way, but most of the high profile ETF launches from last years have done reasonably well. In years past, ETF issuers have guilty of putting the cart ahead of the horse, rushing products to launch and hoping that first-to-market status would be sufficient to create demand. In the new environment, issuers have embraced a new strategy by listening to the market to determine demand and molding the product development strategy in response.
Disclosure: No positions at time of writing.