This has been another stellar year for ETF adoption, with over $175 billion in new money flowing into exchange-traded products. That brings the total US-listed ETF market to over $1.65 trillion. If it weren’t for the billions of outflows in commodity-related ETFs, we would surely surpass $200 billion this year and set a new all-time record for annual inflows.
Investors are thirsty for the flexibility, liquidity, and innovative strategies that ETFs have to offer, which is why I've created my ETF wish list for 2014. The following ideas represent my thoughts on the best way forward for the industry and individual investors in the new year.
One of the biggest advantages of ETFs over mutual funds is their lower average expense ratios. This can lead to thousands of dollars in savings for an investor over a lifetime. It’s no secret that Vanguard and Charles Schwab have built their ETF empires on the backs of the lowest fee structure possible for their passively managed index products.
In 2014, I would like to see more ETF providers follow this model. Barclays took a big step forward this year by releasing several fundamentally weighted ETFs such as the iShares MSCI USA Quality Factor ETF (QUAL) and iShares MSCI USA Momentum Factor ETF (MTUM) with expense ratios of just 0.15%.
Click on the interactive chart to view share price over time.
It’s time that First Trust, Guggenheim, Wisdomtree, ProShares, and other niche ETF providers followed suit by adjusting their fees to be more in-line with the biggest players in the game. I agree that certain innovative index strategies should carry a higher premium over stodgy market-cap weighted products. However, the gap can be narrowed to entice more investors to adopt these ETFs and abandon their high-fee mutual fund alternatives.
More active fixed-income strategies
Pimco revolutionized the fixed-income ETF landscape with the release of the PIMCO Total Return ETF (BOND) in 2012. The fund quickly gained billions in assets and set the bar for a low-cost alternative to a well-established mutual fund franchise. Pimco is following suit with three additional actively managed ETFs based on other successful mutual funds in its lineup.
In 2014, I would like to see more fixed-income rock star managers adopt their mutual funds to ETFs. Some names that come to mind are Jeff Gundlach of Doubleline, Dan Fuss of Loomis Sayles, and Dan Ivacsyn of Pimco. I believe that fixed-income is still one of the best areas for an active manager to add alpha over a traditional passive benchmark. Each of these managers has a long history of strong outperformance and risk management that would benefit an ETF audience. While both Gundlach and Ivacsyn manage closed-end funds, my hope is that they thoroughly consider broadening the scope of their platforms to include an ETF alternative as well.
Fidelity made a big splash this year by releasing the lowest-priced sector ETFs in the world. I think that it should follow this up in 2014 by incorporating ETFs in its suite of 401(k) offerings. As the largest 401(k) provider in the country, Fidelity is in a unique position to start a trend of lowering fees on long-term retirement accounts and broadening the scope of investment choices.
This would likely attract more assets to the Fidelity platform, increase its ETF assets under management, and strengthen its brand among younger investors. It seems like a no brainer to me.
Consolidate and close smaller ETPs
With the total list of US-listed ETFs and ETNs now standing over 1,500 strong, finding the right strategy can be overwhelming at times. Even weeding out the ETFs that you don’t want can be an arduous task.
Fortunately, advisor Ron Rowland has created an ETF Deathwatch list that includes over 300 exchange-traded products with a low level of total assets, weak average volume, and general investor disinterest. This represents approximately 20% of the total number of ETPs available to investors.
Have you ever heard of the Columbia Large Cap Growth ETF (RPX)? It has $2 million in total assets and has been in existence for over four years. In fact, a quick performance comparison shows that it has lagged the SPDR S&P 500 ETF (SPY) over the last three years by nearly 25%. That’s a huge margin of underperformance for a large-cap fund. Chances are it’s time for the issuer to cut its losses and shutter this fund.
I think that consolidating and closing some of these smaller ETFs would likely benefit the industry as a whole since investors would have fewer ETPs to choose from. Only the strongest strategies will ultimately survive and prosper.
The bottom line
2014 promises to be another stellar year for the ETF industry and I am excited to see it evolve over time. My hope is that providers will take these ideas to heart and strengthen the case for further adoption of ETFs across a wider range of investment accounts.
Do you see investing opportunities in these ETFs? Use the list below to begin your analysis.
1. iShares MSCI USA Quality Factor ETF (QUAL, Earnings, Analysts, Financials): Seeks to track the investment results of an index composed of U.S. large- and mid-capitalization stocks. Market cap at $258.50M, most recent closing price at $56.30.
2. iShares MSCI USA Momentum Factor ETF (MTUM, Earnings, Analysts, Financials): Seeks to track the performance of an index that measures the performance of U.S. large- and mid-capitalization stocks exhibiting relatively higher momentum characteristics. Market cap at $194.1M, most recent closing price at $56.30.
3. PIMCO Total Return ETF (BOND, Earnings, Analysts, Financials): The fund invests at least 65% of its total assets in a diversified portfolio of Fixed Income Instruments of varying maturities. Market cap at $3.5B, most recent closing price at $104.42.
5. SPDR S&P 500 ETF (SPY, Earnings, Analysts, Financials): The investment seeks to provide investment results that, before expenses, generally correspond to the price and yield performance of the S&P 500 Index. Market cap at $163.58B, most recent closing price at $183.85.
(List originally compiled by David Fabian for Minyanville. You can find the original here.)
Analyze These Ideas: Getting Started
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Dig Deeper: Access Company Snapshots, Charts, Filings
- iShares MSCI USA Quality Factor ETF(QUAL, Chart, Download SEC Filings)
- iShares MSCI USA Momentum Factor ETF(MTUM, Chart, Download SEC Filings)
- PIMCO Total Return ETF(BOND, Chart, Download SEC Filings)
- Columbia Large Cap Growth ETF(RPX, Chart, Download SEC Filings)
- SPDR S&P 500 ETF(SPY, Chart, Download SEC Filings)
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