As the ETF industry has exploded in recent years, observers have had some very different takes on the pace and nature of the expansion in the product lineup. Some have cheered every first-to-market product, noting that the current offerings have only scratched the surface of what the ETF industry can offer. Others have pointed to the top-heavy nature of the industry -- the 20 biggest funds account for nearly half of all assets -- and surplus of small, aging products as evidence that the industry's expansion got a bit ahead of itself. The last few months have shown that there is some truth to both of these takes on the state of the ETF industry.
Multiple issuers have pulled the plug on ETFs that have failed to gain traction in recent months, giving up on products that for one reason or another never really caught on with investors. Many of the now defunct product offerings were hyper-targeted funds that weren't supported by a strong investment thesis, while other more broad-based funds simply ran up against competition from more established securities [also check out our free Mutual Fund To ETF Converter].
As a rule of thumb, any ETF with assets of less than $25 million is losing money for the issuer (the exact number will obviously vary depending on expense ratio and overhead). At the end of the third quarter, there were more than 350 U.S.-listed ETFs with less than $25 million, including more than 200 with less than $10 million. A big chunk of those funds are relatively new products that are just hitting the sweet spot on their growth curve and will eventually graduate to a higher asset tier. But about 80 of the ETPs with less than $25 million in assets have been around for at least three years without making much of a splash. It wouldn't be the least bit surprising if a number of the veteran funds that haven't done much of the way in assets are closed down over the next 12 months or so, along with some of those that haven't yet hit their third birthday.
So there is something to the argument that the ETF industry has expanded a bit too quickly at times, rushing out products for which there wasn't a viable market. But that doesn't mean that product development should grind to a halt, or that all the good ideas have already been taken. During September and October, about 40 new ETFs debuted. Several of these new offerings are linked to indexes already tracked by existing products, including the seven Russell ETFs and nine S&P funds introduced by Vanguard. But most of the new products to debut over the last two months have been first-to-market ideas, offering exposure to asset classes and investment strategies that previously weren't readily available to many investors [also read New ETFs Grow Up Fast].
Red Hot Starts
Many of these new launches have been tremendously successful, attracting significant amounts of assets over a relatively short period of time. The early success of these products indicates that there are some pretty big stones left to be overturned in the ETF space, and that the industry is far from running out of good ideas. A few of the ETFs to make the biggest splash in just the last two months are:
Market Vectors China ETF (PEK)
Under The Hood: This recent addition to the Van Eck product line is the first U.S.-listed ETF to offer exposure to China's A-Share market, which accounts for a substantial portion of total market capitalization in the world's second-largest economy but has historically been off-limits to international investors. Other ETFs in the China Equities ETFdb Category offer exposure to the country through other types of securities that are more easily accessible, including H-Shares traded in Hong Kong and N-Shares traded on the NYSE and NASDAQ. Thanks to an effort by the Chinese government to expand availability of the A-Share market, certain Qualified Foreign Institutional Investors (QFIIs) now have access to these securities. PEK taps into this market by investing in swaps offered by Credit Suisse, one of the QFIIs with access to the A-Shares market [see Under The Hood Of PEK].
Early Interest: PEK traded more than 500,000 shares during its inaugural session, and since its debut in mid-October has accumulated more than $30 million in assets. Shortly after the launch of PEK, Van Eck filed details with the SEC on an entire suite of A-Shares ETFs, including an all-cap fund and a number of sector-specific offerings.
ETFS Physical Precious Metals Basket Shares (GLTR)
Under The Hood: After launching physically-backed platinum
Early Interest: With interest in precious metals continuing to surge, GLTR has come flying out of the gates. The fund has already raked in more than $30 million in assets, after debuting in late October [also see Playing Precious Metals Through Equity ETFs].
Cambria Global Tactical ETF (GTAA)
Under The Hood: The latest offering from AdvisorShares comes from a partnership with Cambria, the firm run by Mebane Faber and Eric Richardson. Those two are the minds behind The Ivy Portfolio, an influential book that laid out methods for investors to mimic the strategies implemented by major endowments. The work of Faber and Richardson focuses around a global asset allocation model capable of delivering equity-like returns with bond-like volatility and drawdowns, and this actively-managed product allows investors to access their strategies in ETF form [see GTAA: The First Truly Global Asset Allocation ETF].
Early Interest: Active ETFs in general have struggled to gain traction with investors, but GTAA is off to a fast start. The first day of trading saw more than 600,000 shares change hands, and after only a week of trading assets, had grown to more than $17 million.
Emerging Market Consumer ETF (ECON)
Under The Hood: This fund offers exposure to the consumer sector of emerging economies, focusing on both consumer goods and consumer services companies in Mexico, China, India, and other developing markets. More specifically, ECON invests in stocks of automakers, beverage producers, and travel and leisure firms. This sector of the economy doesn't receive a big allocation in the most popular emerging markets ETFs -- cap-weighted products that develop biases towards the financials and energy sectors [see The Case For Emerging Markets Consumer Exposure].
Early Interest: Investors have flocked towards ECON, embracing the fund as an option for "pure play" exposure to the emerging markets consumer -- and some perhaps using the ETF as a complement to EEM
iShares MSCI New Zealand Index Fund (ENZL)
iShares accounts for about half of the ETF market, but the company hasn't been content to rest on its laurels. A number of new iShares funds have hit the market in recent month, including the first to offer pure play exposure to New Zealand equities. ENZL tracks the MSCI New Zealand Investable Market Index, a benchmark that consists of about 25 stocks. ENZL is relatively diverse, maintaining big allocations to the materials, telecom, and consumer discretionary sectors [see Why You Need A New Zealand ETF].
Early Interest: The timing of ENZL was perfect, as investors are looking for ways to access the few developed markets with reasonable growth prospects and financial health -- a description that fits New Zealand perfectly. ENZL has accumulated more than $60 million in assets during its first two months, reflecting investor interest in the unique economy.
Other Intriguing ETF Offerings
The five funds profiled above haven't been the only offerings to stumble upon early success. WisdomTree's Commodity Currency Fund (CCX), which offers exposure to currencies of commodity-intensive economies, quickly crossed the $20 million mark. Van Eck's Rare Earth/Strategic Metals ETF (REMX), which offers exposure to companies engaged in activities related to the mining, refining and manufacturing of rare earth/strategic metals, has grown to more than $20 million in its first two weeks of operation, while Vanguard's recent ETF expansion is gaining traction quite quickly as well [see Vanguard Plans To Shake Up ETF Industry].
What Lies Ahead?
The final two months of 2010 figure to be extremely active on the product development front, and several of the funds currently in the pipeline could continue the recent trend of hot starts from new ETFs. Based on a review of SEC filings, more than two dozen new ETFs could begin trading in November and December (and in fact, several already have). The active ETF space figures to be active, with AdvisorShares close to rolling out its high yield debt fund (HYLD) and Grail perhaps debuting its emerging markets debt ETF. Also on the horizon: the first automotive ETF, an expansion of equal-weighted ETF options, and more targeted international bond options -- among many others.
Innovation continues to be a driver of impressive growth in the ETF industry, as issuers have become increasingly creative in their efforts to deliver products backed by a compelling investment thesis wrapped in the most efficient of structures. While the industry has no doubt gotten ahead of itself at times, any notion that we've run out of good ideas simply isn't true. Stay tuned: the next few months could be quite interesting.
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Disclosure: No positions at time of writing photo is courtesy of Agnieszka Bojczuk.
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