ETF Report: What’s New Through 2012?


Did you know that 10 companies account for 96% of the $1.15 trillion in ETF assets? BlackRock (NYSE:BLK), State Street (NYSE:STT) and Vanguard alone account for 83% of the market share, and 41 ETF producers control just $196 billion in assets.

Of course, while those companies have the most firepower, it doesn’t mean they were solely responsible for all the fireworks in the past year. Companies big and small had a part in some of the most noteworthy ETF launches so far in 2012.

As we look back on some of the new ETFs introduced in the first half of the year and provide some thoughts about the second half of the year, we can be certain of one thing — change is afoot. Be sure to stay tuned as the ETF industry continues to heat up.

Leading off with the earliest fund introduction of 2012, I’ll start with the SPDR S&P Small Cap Emerging Asia Pacific ETF (NYSE:GMFS), which started trading Jan. 11 — giving investors the first ever opportunity to invest in small caps throughout the region.

Prior to the fund’s introduction, there were country-specific funds like the IQ Australia Small Cap ETF (NYSE:KROO), but nothing farther-reaching. Three weeks later, BlackRock introduced the iShares MSCI All Country Asia ex Japan Small Cap Index Fund (NASDAQ:AXJS). The two big differences between the funds: the iShares fund has 17.6% of its assets invested in South Korea while the SPDR has none; secondly, the SPDR has 42% of its fund invested in Taiwan, double the iShares weighting.

In the future, look for additional small-cap fund introductions.

Next up is the event of the year: Bill Gross introduced the PIMCO Total Return ETF (NYSE:BOND) on Feb. 29  — the long-awaited ETF version of his highly successful open-end bond fund. In less than four months, the ETF accumulated $1.7 billion in assets.

That’s not a big number when you consider that Vanguard and iShares both have total bond market funds with assets greater than $15 billion. However, when you calculate the assets gathered on a yearly basis, PIMCO is much farther along in its development. Especially if you consider that Gross’ fund is actively managed while the other two are passive index funds. With just 30 or so actively managed funds available, investors clearly are not taking to any of these funds — with PIMCO the rare exception.

I don’t see any reason why Gross can’t duplicate the success he’s had with his mutual fund. This could be a game-changer for active ETFs.

State Street introduced three actively managed ETFs on April 26. The one that stands out for me is the SPDR SSgA Global Allocation ETF (NYSE:GAL), which is a fund-of-funds that invests in equities, fixed income and real estate around the globe and uses 17 State Street ETFs and the PowerShares DB Gold Fund (NYSE:DGL) to make the portfolio sing.

At 0.35%, investors get a portfolio with 35% U.S. equities, 24% international equities, 29% U.S. fixed income, 4% international fixed income, 7% U.S. and international REITs and 1% commodities.

Being a new fund and actively managed to boot, it’s near impossible to guess how it’s going to perform long-term. U.S. News, however, gives it a “best fund” rating for Global Equities seeking capital appreciation. Frankly, if simple and cheap is your objective, I don’t think you can do any better than this relatively unknown gem.

This next ETF is the first and only fund to date from ArrowShares, a small firm based in Olney, Maryland. The Arrow Dow Jones Global Yield ETF (NYSE:GYLD) seeks to replicate the performance of the Dow Jones Global Composite Yield Index. The index itself is equally weighted across five sub-indexes with a 20% allocation to global sovereign debt, global corporate debt, global alternative assets, global real estate and global equity.

Those five are then equally weighted with 30 holdings each for a total of 150. The index is rebalanced quarterly and is equally weighted to avoid over-exposure to individual securities. The index’s premise is to identify the 150 highest yielding investable securities in the world. Targeting a 7.43% yield, the portfolio managers have started the right type of fund in a yield-starved world.

Unfortunately, the fund is so small that its odds of survival are slim at best. It’s too bad because even though it charges 0.75%, it brings something new to the ETF table.

This next ETF is from the smallest company in the billion-dollar club — firms with assets of more than $1 billion as of the end of May. On June 4, Global X brought out the Global X Top Guru Holdings Index ETF (NYSE:GURU), which seeks to replicate the returns of the Top Guru Holdings Index.

The index was created by Frankfurt-based Structured Solutions AG. The company takes the highest conviction stock ideas of approximately 50 hedge fund managers in the U.S. and then invests an equal weight among all 50 stocks. It’s rebalanced quarterly to keep up with changes in the hedge fund manager’s holdings. Unlike the typical 2/20 hedge fund fee structure, Global X charges just 0.75%.

I’m surprised there aren’t more funds structured around the hedge fund business. It seems on a daily basis I’m reading about one or more guru’s and their holdings. It’s about time somebody did something about the investor fascination with hedge funds.

Lastly, I’m interested in a fund brought out on June 29 by ALPS Holdings, a Denver-based company that caters to the advisor community. Using a hybrid of third-party and internal investment solutions, it’s able to provide advisers and their investors with funds that stand out from the rest of the advisor community. ALPS’ most recent ETF is the ALPS Sector Dividend Dogs ETF (NYSE:SDOG), which applies the “Dogs of the Dow Theory” on a sector-by-sector basis to the S&P 500.

The underlying index — the S-Network Sector Dividend Dogs Index — invests an equal amount in the five highest yielding stocks from all 10 sectors of the S&P 500 using the data from the last business day in November. The ETF will be reconstituted annually and rebalanced quarterly. The current yield of the underlying index is 4.97%, more than double the S&P 500. At an expense ratio of 0.4%, it’s a very tempting investment.

Overall, the first half of 2012 has been an interesting six months. It started out fast and furious but by March had lost all momentum until June when things picked up again. I expect product introductions to be steady in the second half with some consolidation of the firms outside the billion-dollar club. My hunch is that Northern Trust (NASDAQ:NTRS) will be a buyer sometime in the near future, and it wouldn’t surprise me if Global X was the target.

Don’t quote me on that — it’s just a hunch.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

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