This has been another banner year for the ETF industry, and a big story is Bill Gross’ splashy debut in the world of exchange-traded funds. But it isn’t the only story.
For one, the success of the Pimco Total Return ETF (NYSEArca: BOND) tells a broader tale of the hunger for yield that prevails in this post-crash era of financial repression, as six of the 10 most successful ETF launches this year were focused on fixed income.
Even more broadly, 2012 is also a year when fund sponsors showed keen efficiency in rolling out the strategies that investors seemed to be craving.
But if ETF investors are quick to conclude that 2012 is the year of BOND, they can be excused.
After all, the ETF version of $260 billion Pimco Total Return Fund (PTTRX)—the biggest mutual fund in the world—was the most successful launch of the year.
It took BOND just 2.5 months to reach the $1 billion milestone—faster than any other fund in the 20-year history of ETFs save for the SPDR Gold Shares (NYSEArca: GLD), which took three days in November 2004 to hit the $1 billion bogey.
In 10 months, BOND has become a $3.7 billion ETF with just $600 million fewer in assets than all the 162 other ETF launches this year, combined.
The $4.3 billion all those other funds gathered were in a broad range of strategies ranging from global high-yield bonds to inverse copper funds to hedge fund replication strategies.
If that doesn’t highlight just how well received BOND was, I don’t know what will.
But as I said, just because BOND was such a powerhouse doesn’t mean other issuers don’t have their own success stories to hang their hats on.
If the past year taught us anything, it’s that investors and advisors are desperate for yield and that issuers have been falling over each other to issue products to satisfy their needs.
Moreover, investors seem willing to be increasingly creative in their search for yield, taking on additional risk when necessary.
Again, of the 10 most successful launches this year, no fewer than six were bond strategies, and only one of those was a traditional Treasurys portfolio.
The second-most-successful launch of the year, SSGA’s SPDR Barclays Short Term High Yield Bond ETF (NYSEArca: SJNK) is the perfect example of this. It has attracted almost $500 million in assets since its March launch.
As a short-duration credit play, SJNK allows investors to fine-tune the types of risks they take in targeting yield, adding a segment of the bond market previously unavailable in the ETF wrapper.
A Fund Sponsor’s Nose Knows
One of the biggest takeaways from 2012 should be just how efficient the product development pipeline has become and how quickly issuers have been adapting to the demands of the marketplace.
In fact, while the pace of launches in 2012 actually slowed, asset uptake continued unabated—so much so that we are again nearing record ETF asset levels. To that end, issuers have become more calculated in their launches, eschewing the days of “let’s see what sticks” and ushering in an era centered more around “what do investors want?”
Take the First Trust North American Energy Infrastructure ETF (NYSEArca: EMLP), for example.
MLPs have become an increasingly popular means for investors to get yield, and the ETF wrapper has been a very popular vehicle for investors looking at them.
That popularity is both a blessing and a curse and, in the case of the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ), the demand outweighed the note’s ability to absorb assets, and eventually it was forced to halt creations and now basically trades as a closed-end note.
The launch of EMLP was conveniently timed in this regard, as First Trust stepped in with a credible, and distinct, alternative. As opposed to some competing funds, EMLP goes beyond strictly owning U.S.-listed MLPs, including refineries and Canadian-listed pipeline and transportation firms whose business models mimic those of MLPs.
If the year’s most successful launches taught us anything, it’s that the ETF industry is an open book that continues to rewrite its own history.
The landscape at the beginning of 2012 looked much different that it does now, nearly 12 months later.
The evolution continues, and what we’ve learned is that issuers and advisors are making sure that evolution suits the needs of everyone.
At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Baiocchi at email@example.com.
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