The Importance Of 2014’s Least Popular ETF

January 06, 2015

Investors clearly loved plain-vanilla ETFs in 2014, but the best news isn’t about the winner funds, it’s about outflows.


2014 saw the awkwardly constructed PowerShares QQQ ETF (QQQ | A-48) shed more assets than any other fund. QQQ’s single-exchange, no-financials selection universe has earned it top billing on’s list of idiosyncratic funds. That is, funds constructed without reference to any economic concept.


2014 was a heartbreaking year for the idiosyncratic funds, which lost nearly $2 billion in assets. In a year where the industry took in almost $244 billion, losing assets is a huge slap in the face.


When the idiosyncratic funds like QQQ lose assets to funds with well-grounded index methodologies, whether market-tracking vanilla funds or financial-analysis-based strategic ones, investors win.


For background, let’s dig into the 2014 flows by strategy so you can see what I’m talking about.


Four Types Of Strategies designates a strategy for every fund in the basic asset classes: equity, fixed income, commodities and currencies. We list 28 strategies overall, including vanilla, active, low-volatility, dividends, growth, value and equal-weighted.


These strategies fit into four groups: vanilla, active, strategic and idiosyncratic.


Vanilla funds are the simplest. They’re broad-based, cap-weighted, index-tracking funds meant to capture an entire market. Examples include the SPDR S&P 500 ETF (SPY | A-98)  and the Vanguard Total Bond Market ETF (BND | A-94).


Strategic and idiosyncratic indexes and the funds that track them deviate from plain vanilla because they pick some—but not all—of the securities in their universes, and/or because they employ an alternative weighting scheme.


The critical difference comes in what type of rules they use.


Strategic funds employ rules based on financial concepts such as financial statement analysis, macroeconomic assessments or risk metrics. They focus on economic metrics such as dividend yields, price-to-book ratios, earnings per share, GDP growth and volatility.


Well-known strategic funds include the Vanguard Value (VTV A-100), the iShares Russell 1000 Growth (IWF | A-89), Vanguard High Dividend Yield (VYM | A-94), the PowerShares FTSE RAFI US 1000 (PRF | A-88) and the PowerShares S&P 500 Low Volatility (SPLV | A-45).


Idiosyncratic funds, in contrast, select securities following nonfinancial rule sets. The Guggenheim S&P 500 Equal Weight (RSP | A-80), iShares Transportation Average ( IYT | B-60) and the iShares Nasdaq Biotechnology (IBB | A-26) are all popular idiosyncratic funds. They might focus on a single exchange (IBB), or weight all securities equally (RSP) or simply hold equal numbers of shares, disregarding price (IYT). But none applies any financial reasoning to portfolio construction.


Active funds have humans managing their portfolios. They don’t track indexes. 2014’s largest active ETF was the PIMCO Enhanced Short Maturity Strategy (MINT | B).’s strategy designations are key to calling the asset-gathering horse race. So let’s get started.


Vanilla For The Win, Strategic Making Strides

Nine of 2014’s top 10 inflows went to plain-vanilla funds: broad-based, cap-weighted stalwarts.


Top 10 Funds By Net Inflows

Ticker Fund Strategy Net Inflows ($)
SPY SPDR S&P 500 Vanilla 24,909,786,965
IVV iShares Core S&P 500 Vanilla 10,678,727,660
VOO Vanguard S&P 500 Vanilla 10,210,983,922
BND Vanguard Total Bond Market Vanilla 7,724,239,220
AGG iShares Core U.S. Aggregate Bond Vanilla 7,366,294,440
VEA Vanguard FTSE Developed Markets Vanilla 7,203,567,463
VTI Vanguard Total Stock Market Vanilla 7,157,836,799
EFA iShares MSCI EAFE Vanilla 5,009,919,420
XLE Energy Select SPDR Vanilla 4,998,929,795
HEDJ WisdomTree Europe Hedged Equity Currency Hedged Fundamental 4,886,524,245


Data:, as of Dec. 31, 2014


Inflows beyond the top 10 tell the same story. Of the 70 funds that drew in more than $1 billion in 2014, only 18 were anything but vanilla. To put it another way, almost 73 percent of all investor dollars went into plain-vanilla funds. Strategic funds pulled in more than a quarter of new money.


And, as I said at the outset, it’s clear that the idiosyncratic funds are in trouble ...



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