Our 2008 ETF Predictions
December 27, 2007
by Tom Lydon
It was a busy, exciting year in the world of exchange traded funds (ETFs) in 2007. But it's not time to rest on our laurels just yet, because all indications are that 2008 is going to be even bigger and better. Hundreds of new ETFs are in registration, the assets continue to flow and the word of mouth is spreading.
Here are the top ten trends we see taking place next year.
1) Global markets will no longer be in sync with the U.S. market, and ETFs are the way to take advantage of global growth.
We all know by now that the U.S. no longer dominates the global economy. As emerging markets continue to move out of their "emerging" status and stand on their own, the performance of their economies becomes less pegged to ours. Global consumption is simply going to be less dependent on the U.S. and its consumers than it was. In fact, it's a trend that's been developing for much of the 2000s. The graphic at left shows how the U.S. and global markets have been steadily diverging since 2001.
Investors will be able to take advantage of this "decoupling" with ETFs by investing in those economies that are outperforming our own.
(Graphic courtesy of the Wall Street Journal)
2) Actively managed ETFs fail to generate excitement.
We predicted this last year, but it turns out that actively managed ETFs have yet to arrive. That isn't for a lack of effort, though. There are a number of them in registration with the Securities and Exchange Commission (SEC), notably from Vanguard, Bear Stearns and PowerShares. If and when they do hit in 2008, our original assessment stands: they will be a disappointment and fail to ignite the interest of most investors.
As we said before, two-thirds of ETF assets are coming from institutional investors looking to allocate within certain asset classes. They know what they're looking for, and they don't need or want a manager doing their research for them.
3) ETFs hit $1 trillion in assets.
At the end of 2006, there were $422 billion in assets in ETFs. By the end of this year, assets will be approaching $600 billion. If things continue at this pace, we think the industry won't have to work too hard to hit the $1 trillion mark.
As of Dec. 20, there are 445 ETFs and ETNs in registration with the SEC. A number of them are highly creative products, or they're products that cover as-yet untapped regions and sectors. More choices and more originality in the offerings will inevitably equal more assets coming in.
4) More ETFs will appear on global exchanges.
In Europe, ETFs have only been in existence for about seven years, but they're becoming increasingly popular, so look for the ETF offerings to expand on European exchanges as well. The Taiwan Stock Exchange Corporation (TSEC) is developing ETFs with the Abu Dhabi Securities Market (ADSM), and the ETFs will be traded on both exchanges. The word about ETFs and their benefits is spreading throughout Asia, too, and as investors over there become more educated about them, it's certain that we'll see a great deal more of them listed on their exchanges.
5) Bigger players will enter the market.
Look for big names to enter or grow bigger in the ETF playing field, such as Fidelity and T. Rowe Price. As we've said before, Fidelity just has the one ETF: Nasdaq Composite Index Tracking Fund (ONEQ). Sooner or later, the large mutual fund providers are going to have to give in and start capitalizing on the growing popularity of ETFs rather than trying to protect their domain of higher cost mutual funds in 401k plans.
ING Direct bought ShareBuilder, which offers ETF based 401k plans, late in 2007. This makes this ING's first time in the ETF marketplace. With this acquisition, we're hoping we'll see even more firms capitalizing on the trend of putting ETFs into retirement plans. We also predict that Morningstar, which currently has indexes tracked by 10 ETFs, will come out with a deeper offering of ETF related products, if their partnership with Claymore is any indication.
6) Commodity ETFs will continue their expansion and gain even more popularity.
In 2007, the commodity ETF offerings and assets in them grew by leaps and bounds, thanks in large part to the excitement small investors were feeling at having this asset class available to them and the success of certain commodities ETFs. As of December 27, PowerShares DB Commodity Index Tracking Fund (DBC) was up 31.4%; iShares S&P GSCI Commodity-Indexed Trust (GSG) was up 32.9%.
Next year will be no exception. A number of commodities-based ETFs are already in filing with the SEC, including:
- iShares GS Commodity Energy Trust
- iShares GS Commodity Industrial Metals Indexed Trust
- Greenhaven Continuous Commodity Index Fund
- ProShares Ultra Dow Jones - AIG Commodity Precious Metals
- ProShares Ultra Gold
- ProShares Ultra Crude Oil
- Market Vectors - Coal
- United States Heating Oil Fund
7) Fixed-income assets will grow.
Fixed-income ETFs are just getting started, and 2008 could be their year for really taking off. Fixed-income ETFs are bond index funds that trade like stocks on an exchange. They're attractive to certain types of investors, namely, those with more conservative portfolios, who are looking for more stability, since the bond market is generally less volatile than the stock market.
Assets in the funds have been steadily growing since the first ones appeared on the market in 2002. Fixed-income ETFs ended their inaugural year with $3.9 billion in assets; by the end of 2006, their assets climbed to $20.5 billion. In October 2007, assets in them stood at $31 billion. Expect bigger and better things for these funds in 2008.
8) U.S. investors will begin realizing that they can look abroad for their investments.
International investing is losing its reputation for being extremely risky. In 2008, U.S. investors are going to become aware of the fact that they're underinvested in global markets. According to JP Morgan, the average defined contribution plan participant only invests 5% internationally. We predict that investors are going to realize that they're missing out on a golden opportunity, especially as the U.S. economy continues to face challenges.
Global markets, especially emerging ones, are having gross domestic product growth in the double digits. True, these areas are more volatile, but the upside potential appears to be stronger, and U.S. investors are seeing it in increasing numbers.
At the end of 2006, $111.2 billion was invested in global indexes. By October 2007, the number had ballooned to $183.7 billion. We fully expect this trend to continue.
9) Individual investors will start asking their financial advisors why ETFs aren't part of their portfolios.
In fact, it's already started to happen: financial advisors are beginning to embrace and learn about increasingly sophisticated tools, such as ETFs. The survey by Cogent Research showed that over the next two years, the open-end mutual fund will lose more than 10% of its share of the product mix by 2009, partially in response to pressure on advisors to be productive wealth managers.
There has been tremendous growth in the ETF industry in recent years, and the word about them is continuing to spread. As more and more investors learn about them and the advantages they offer, we predict that they'll be running to their advisors and asking, "Why aren't these in my portfolio?"
10) An ETF of ETFs will finally hit the U.S. market.
So, Canada beat us to the punch on this one. Claymore in Canada launched the Claymore Global Balanced Income ETF and the Claymore Global Balanced Growth ETF on the Toronto Stock Exchange earlier this year.
An ETF of ETFs for those of us in the U.S. is surely the next step in 2008.
