The Importance Of 2014’s Least Popular ETF

The losers often tell a pithier tale than the winners.

Director of Research
Reviewed by: Elisabeth Kashner
Edited by: Elisabeth Kashner

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

TickerFundStrategyNet Inflows ($)
SPYSPDR S&P 500Vanilla24,909,786,965
IVViShares Core S&P 500Vanilla10,678,727,660
VOOVanguard S&P 500Vanilla10,210,983,922
BNDVanguard Total Bond MarketVanilla7,724,239,220
AGGiShares Core U.S. Aggregate BondVanilla7,366,294,440
VEAVanguard FTSE Developed MarketsVanilla7,203,567,463
VTIVanguard Total Stock MarketVanilla7,157,836,799
EFAiShares MSCI EAFEVanilla5,009,919,420
XLEEnergy Select SPDRVanilla4,998,929,795
HEDJWisdomTree Europe Hedged EquityCurrency Hedged Fundamental4,886,524,245


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 ...




2014 ETF Inflows By Strategy Group

GroupNet Flows ($)Net Flows (%)

Data:, as of Dec. 31, 2014


The Biggest Loser

Nowhere was this clearer than with the year’s biggest flows loser, QQQ. The fund shed more than $11 billion via outflows this year. That’s about one-fourth of its assets,


What is particularly interesting to me is that investors seem to have deliberately divested from QQQ, but plowed money into all of QQQ’s themes: technology, growth and large-caps.


U.S. Technology ETFs as a whole saw healthy inflows of $2 billion in 2014. U.S. large cap growth and U.S. total market growth ETFs drew in a combined $9.3 billion this past year. Excluding QQQ, U.S. large-caps gathered more than $57.8 billion in assets during 2014.


Could investors finally be ditching what Dave Nadig once called the worst index in the world in favor of more straightforward tools, such as:



After all, few folks who want to access these themes need to restrict themselves to QQQ’s Nasdaq-listed nonfinancial stocks with two years of trading history. Nor do they need QQQ’s position limits workaround of capping behemoths like Apple, and then equal-weighting a section of the lower end of the market-cap spectrum.


Investors are making use of better tools to build their portfolios. Remember, the top asset gatherers—the S&P 500 funds, the Barclays Aggregate trackers, the developed equities funds and VTI, Vanguard’s Total Stock Market—are all broad-based, cap-weighted funds that reflect major portions of the global equity markets or the U.S. bond market. Hallelujah.


2014 Wrap-Up

When you use good data—clean fund flows and well-researched strategy designations—2014’s trends become clear.


Vanilla is still king, and investors are abandoning idiosyncratic funds. That’s a clear win for broad-based, cap-weighted, transparent, low-cost investing. It’s even good news for complex funds that have a clear economic rationale behind them. 

At the time this article was written, the author held IVV and EEM. Contact Elisabeth Kashner at [email protected].



Elisabeth Kashner is FactSet's director of ETF research. She is responsible for the methodology powering FactSet's Analytics system, providing leadership in data quality, investment analysis and ETF classification. Kashner also serves as co-head of the San Francisco chapter of Women in ETFs.