3 ETF Trends of 2011 … and 3 Predictions for 2012

Happy New Year! I know 2012 isn’t here just yet, but it’s never too early to get started.

Today I’ll give you my top three predictions for next year’s ETF news. First, though, let’s take a look at three interesting trends we’ve seen unfold in the last twelve months.

Small Cap Country ETFs

Internationally-minded investors appreciate the ability to fine-tune their geographic allocations with single-country ETFs. With these instruments you can easily increase or decrease exposure as conditions change.

Now, global small-cap investors are gaining the same ability. Single-country ETFs now cover small-stock benchmarks in China, Brazil, India, Russia, Japan, and others. More are on the way. For now, here’s what is available.

  • WisdomTree Japan Small Cap Dividend (DFJ)
  • iShares MSCI Japan Small Cap (SCJ)
  • SPDR Russell/Nomura Small Cap Japan (JSC)
  • IQ Canada Small Cap ETF (CNDA)
  • Market Vectors Germany Small Cap ETF (GERJ)
  • Market Vectors Brazil Small Cap ETF (BRF)
  • Guggenheim China Small Cap ETF (HAO)
  • iShares MSCI Brazil Small Cap (EWZS)
  • Market Vectors India Small Cap ETF (SCIF)
  • EGShares India Small Cap ETF (SCIN)
  • iShares MSCI China Small Cap (ECNS)
  • IQ South Korea Small Cap (SKOR)
  • Market Vectors Russia Small Cap ETF (RSXJ)
  • Global X Mexico Small Cap ETF (MEXS)

Low-Volatility ETFs

Investors get the message: Bear markets are not fun. At the same time, they don’t want to sit in cash at near-zero interest rates. They want alternatives, and the ETF industry is responding.

A new breed of fund tries to find the difficult balance between stability and growth. The methodology varies, and I’m not convinced all the ETFs in this category will be able to achieve their objectives over time. We’ll see.

Here are some examples.

  • EGShares Low Volatility Emerging Markets Dividend (HILO)
  • Guggenheim Defensive Equity (DEF)
  • PowerShares S&P 500 Low Volatility Portfolio (SPLV)
  • iShares MSCI Emerging Markets Minimum Volatility (EEMV)
  • iShares MSCI All Country World Minimum Volatility (ACWV)
  • iShares MSCI EAFE Minimum Volatility (EFAV)
  • iShares MSCI USA Minimum Volatility (USMV)
  • Russell 1000 Low Volatility (LVOL)
  • Russell 1000 Low Beta (LBTA)
  • Russell 2000 Low Volatility (SLVY)
  • Russell 2000 Low Beta (SLBT)
  • Russell Developed ex-U.S. Low Volatility (XLVO)
  • Russell Developed ex-U.S. Low Beta (XLBT)

Individual investors often know little about the bond market. The practical difficulty of bond trading in small amounts has been a big problem for decades.

I find this sad because, like stocks, bonds come in many different flavors and risk levels. So I’m glad to see ETF sponsors make it feasible for investors to target narrower slices of the bond market.

In 2011 we saw a number of gaps filled with ETFs such as …

  • Guggenheim BulletShares 2014 HY Bond (BSJE)
  • WisdomTree Asia Local Debt Fund (ALD)
  • SPDR Barclays Issuer Scored Corporate Bond (CBND)
  • Market Vectors Investment Grade Floating Rate (FLTR)
  • iShares Global Inflation-Linked Bond (GTIP)
  • Market Vectors CEF Municipal Income (XMPT)
  • PowerShares Chinese Yuan Dim Sum Bond (DSUM)
  • PIMCO Germany Bond Index Fund (BUND)
  • PIMCO Canada Bond Index Fund (CAD)
  • PIMCO Australia Bond Index Fund (AUD)
  • Market Vectors Emerging Markets Local Currency Bond (EMLC)
  • FlexShares iBoxx 5-Year Target Duration TIPS (TDTF)
  • PowerShares Convertible Securities Portfolio (CVRT)
  • Market Vectors Latin America Aggregate Bond ETF (BONO)

Top ETF Predictions for 2012

So what’s coming next? I think 2012 will bring fewer new offerings as sponsors try to improve marketing for their existing products. We’ll also see new players as the mutual fund industry finally sees the writing on the wall.

2012 Prediction #1:
The current ETN format bites the dust

As you know, I’ve long been skeptical of exchange-traded notes. These hybrids can be useful in a few situations, but I think their drawbacks will increasingly push investors to choose ETFs instead.

The main problem with ETNs is credit risk. The idea of a major bank going out of business is no longer unthinkable. It happened to Lehman Brothers, and it can happen again.

Recent ETN offerings have been met with little demand. Frankly, I’m not sure why the sponsors keep trying. Maybe it’s pure inertia. In any case, the ETN pendulum is starting to swing the other way. Some sponsors will finally offer to “secure” their ETNs by pledging the proceeds from the sale of the notes. This will make the current “unsecured” ETNs obsolete overnight.

2012 Prediction #2:
Unpopular ETFs will be culled

I’m all for innovation, but I’m not a big fan of “me too” ETFs. Such funds account for a big share of the new offerings. Sponsor A enters a new niche, so sponsors B, C, and D create copycat products.

The sad truth is that some of these narrow segments just aren’t big enough to support multiple ETFs. In most cases, assets gravitate to whoever made the first move, anyway.

I’m anticipating a big shakeout in 2012. The strong and truly useful ETFs will survive. The duplicative and useless products will disappear as sponsors tire of subsidizing them.

2012 Prediction #3:
Fidelity will finally make its move

Back in the 1990s, Fidelity Investments had a big lead in mutual fund assets. Vanguard was typically a close second. Somewhere along the line, Vanguard decided to enter the ETF battle. Fidelity declined, other than to offer one token Nasdaq-based ETF.

Recently regulatory filings indicate Fidelity is re-thinking that decision. The firm has the capital and marketing muscle to catch up. I think Fido will jump into the ETF business with both feet next year.

Fidelity’s big brokerage operation and deep access to the corporate retirement-plan market will be its key weapons. They already offer no-transaction-fee trading in certain iShares ETFs. Imagine the same thing with dozens (or hundreds) of house-branded ETFs, and then imagine those same ETFs as investment options in the big-company 401(k) plans.

Fidelity may or may not win the war, but the Boston giant won’t go down without a fight. And the whole industry could go through big changes in the process.

Will my predictions come true? We won’t know until a year from now. But two things I can be 100 percent sure of: The ETF revolution is far from over. And I will be sending my International ETF Trader members frequent updates on all the recommended open positions, the global economy, the markets and more every step of the way.

Best wishes for a happy New Year,


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