Most Interesting New ETFs Of 2014

While the fat lady hasn’t sung yet, these three ETFs strike me as the coolest launches of the year.

2014 has been a big year for ETF launches. As of Dec. 9, we had 113 new funds, pulling in nearly $7.5 billion in assets. But not all of these new funds are actually going to succeed, and not all of them are—to be honest—interesting or even useful.

Investors have voted strongly with their dollars regarding which funds they think are interesting and useful. Just two funds from First Trust—the First Trust Enhanced Short Maturity (FTSM) and the First Trust Dorsey Wright Focus 5 (FV | B-23)—have pulled in a total of $2.4 billion, showing that niche products targeted to specific audiences can get good traction. But I think there are some sleeper hits in this year’s launches that can provide real opportunities for some investors. My top three:

iShares Core MSCI Europe (IEUR | A-99)

Investors looking to play the continued European recovery—a theme I think is going to be dominant in 2015—now have an even better option than our current segment leader, Vanguard FTSE Europe (VGK | A-98). While VGK is currently 2 basis points cheaper, at 0.12 percent in total expenses, I think IEUR is just a better fund. Why?

It reaches down into the small-cap companies I think are likely to benefit most from a recovering European economy. While broadly speaking, the country and sector weights are similar, IEUR’s mid- and small-cap exposure also give it a bit more consumer weight, and that’s probably a good thing. Assets in IEUR have come in steadily, and since its launch in June, it now boasts almost $200 million and trades well.

Deutsche X-trackers Harvest MSCI All China Equity ETF (CN | F-80)

Have I lost my mind? I’m talking about a fund that scores an actual “F” in the ETF.com ratings system.

No, I did not lose my mind. Last year at the annual Inside ETFs conference in Florida (you’ve booked your tickets, right?), Elisabeth Kashner, our director of research, actually stood on stage and begged—literally begged—for someone to come up with a fund that would invest in Chinese companies regardless of where their shares were listed.

Deutsche delivered, and gives investors, finally, real exposure to all types of Chinese stocks. The problem has been liquidity. On most days, CN trades less than 2,000 shares, making it very tricky for the average investor. But as the fund gains traction and volumes pick up, it seems to me still the most logical way to play China.

FlexShares Disciplined Duration MBS Index (MBSD)

Launched just in September and still sitting on the $5 million it launched with, MBSD is a truly unique animal. Oh, there are other mortgage-backed securities ETFs out there—the iShares MBS ETF (MBB | A-99) has almost $7 billion in assets, and there are a half dozen competitors.

The argument for MBS as a yield generator is pretty clear: You’re counting on the implicit and explicit government backstop on the credit risk, while getting a little bit more yield. Traditional MBS ETFs have a problem: They generally just include any new tranche of mortgage-backed securities that's issued.

But those new issuances can look very different from what the fund might currently be holding, with longer time horizons, different prepayment expectations (a real risk in MBS), and different sensitivities to changes in interest rates. This ETF solves that by actively choosing which securities to hold, keeping the portfolio as consistent as possible.

But MBSD is a clever twist: It takes an interesting but variable asset class and adds a level of predictability, making the yield versus duration trade-off much easier for investors to manage.

Those aren’t the biggest or flashiest launches from 2014, but to my mind, they’re among the most useful.

At the time this article was written, the author held no positions in the securities mentioned. You can reach Dave Nadig at [email protected], or on Twitter @DaveNadig.