As far as eye-popping numbers go, I can’t help but worry about my baby browns every time that I’ve seen “$1.3 trillion” as the figure representing assets parked in exchange-traded funds.
Folks, when you’re lugging around more money than the GDP of Mexico (yes, I looked it up), you’ve earned a spot among the myriad “look back/year-ahead” pieces churned out this December.
Thing is, very few things actually change between Dec. 31 and Jan. 1. A few of 2012’s biggest trends were either already in the making the year before or will be seeing themselves peter out in 2013 — and a few of 2013’s biggest trends have already gotten legs.
That doesn’t make ‘em any less important to note:
Year of the ETF: Technically, 2008 — when exchange-traded funds amassed $168.3 billion in new assets — was the “Year of the ETF.” But 2012 is poised to top that, with $154 billion making its way into ETFs through November. That said, while the party line is “at the cost of mutual funds,” don’t be so quick to judge. Mutual funds have brought in more than $250 billion in new assets year-to-date. It is more likely that investors of all sizes are seeing the advantages to ETFs vs. individual stocks.
Flight to income: This year’s exodus from U.S. stock mutual funds and into income is well known — U.S. stock mutual funds have seen $100 billion walk out the door this year. But U.S. stock ETFs? They’ve gained $30 billion in new assets year-to-date, just less than the $32 billion that moved into international stock ETFs. But consider this:
|Total Assets (billions)||YTD Gains (billions)||Increase Over 2011|
|U.S. Stocks||$457 billion||$30.2 billion||7.1%|
|International||$268 billion||$31.9 billion||13.5%|
|Taxable Bond||$225 billion||$48 billion||27.1%|
|Municipal Bond||$12 billion||$3 billion||33.3%|
|Emerging Market Bond||$12.4 billion||$5.4 billion||77.1%|
In short, U.S. stock ETFs did well, but it seemed to be lifted by a rising tide of money coming into exchange-traded funds in general. The real heavy-hitter was income of all sorts, though investment-grade bonds really stuck out. More than $16 billion has flowed into these funds YTD, and the iShares $ Investment Grade Corporate Bond Fund (NYSE:LQD) hit $26 billion AUM, unseating the iShares US TIPS ETF (NYSE:TIP) as the largest fixed-income ETF in the world, according to ETF Daily News. And speaking of bonds…
Bill Gross puts active ETFs on the map: 2012 started out with 39 actively managed ETFs on the market, and ended with just 55 … 14 new ETFs does not a trend necessarily make. But the PIMCO Total Return ETF (NYSE:BOND) showed ETF providers that actively managed ETFs can become blockbuster hits. The manager of the world’s most popular bond fund, PIMCO Total Return (MUTF:PTTRX), took the income world by storm in March by launching an ETF counterpart — BOND became only the second actively managed ETF to top $1 billion in AUM, and it’s now on pace to amass more than $4 billion in assets. Heck, it even has beaten PTTRX in returns, 6% to 4.6%.
All the best ideas are taken: Think about the iPhone. The first one broke the mold in smartphones. Each subsequent version added various features that were splashes, to be sure, but also less life-changing. I think ETFs have the same problem.
We don’t need another S&P 500 tracker or another utilities ETF, so each successive launch is either more niche in what it invests in, or more complex (and even active) in how it invests.
That isn’t to say we’re not going to see any more novel concepts; I happen to like the thrust of the ALPS Sector Dividend Dogs ETF (NYSE:SDOG, more here), for instance. But we’re continuing to see more splicing-the-spliced funds, like the PureFunds ISE Mining Service ETF (NYSE:MSXX), which is “involved in facilitating the operations of the mining services industry” — in other words, a tangential mining play.
No, really … they’re taken: This can be interpreted in different ways, but when I saw iShares’ new “core” funds — which are either retitled existing funds or ones that overlap with existing iShares funds — I shuddered. Price is going to be the major battleground going forward, not innovation, and that’s bad news for all but the biggest ETF providers.
Earlier this year, Scottrade shut the doors on its ETF business. Telling was the fact that its Focus Morningstar Consumer Cyclical Index ETF (NYSE:FCL) only brought in $3 million in AUM despite charging a scant 0.19% in fees, only 1 basis point more than its biggest competitor, the Consumer Discretionary Select Sector SPDR (NYSE:XLY). I think more smaller providers will get squeezed out in 2013.
A harsher year than 2012: Between profit worries and a lack of innovation, expect plenty of ETFs to hit the skids — after all, we’re already seeing it happen in record numbers. If you haven’t been to Invest With an Edge’s ETF Deathwatch blog, go — it keeps track of the exchange-traded world and keeps a running list of products it thinks could go kaput based on several criteria. While AUM isn’t everything, and the number for profitability is a rapidly moving target, the point is sound: If a fund isn’t popular enough, it probably will die.
From August through October, the monthly number of failed exchange-traded products kept beating previous records, and year-to-date, Deathwatch has counted 92 closures (not counting several announced ones for December). Total listings actually increased last month, but as of November, the 1,445 ETPs on the market was less than the all-time high of 1,490 reached in mid-August. That peak might just stand.
One Final Note
My pessimism going into 2013 doesn’t mean ETFs have suddenly become a nuclear wasteland, one that must go untouched by human hands. In fact, I still believe most investors would be better off investing in indexed ETFs than trying to pick stocks on their own. I just think most of the big fireworks in the exchange-traded world have been fired at this point.
I hope I’m wrong.
Kyle Woodley is the Deputy Managing Editor of InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @IPKyleWoodley.