ETF Analyst Roundtable: 2011 And 2012

December 30, 2011

An ETF-centric look back at what mattered in 2011 and a look forward to what’s worth watching in 2012.


Quite a lot happened in the world of exchange-traded funds in 2011, not the least that assets kept rolling into ETFs, even as uncertainty surrounding the global economy remained just as acute as it was when markets collapsed in 2008.

ETFs raked in almost $121.5 billion this year through Dec. 29, and total assets in U.S-listed ETFs are up almost 5 percent to more $1.058 trillion. That number includes market movement, which is saying a lot about the growing popularity of ETFs, considering the S&P 500 Index was unchanged this year.

The Senate hearing in Washington, D.C. in October on the dangers of ETFs has to be near the top of anybody’s list of top ETF stories this year—simply because it was a clear suggestion that ETFs are reaching critical mass and about to enter the public consciousness in a big way.

What follows is a virtual roundtable of our in-house talent sharing their views. Each opinion, in its own way, reflects IndexUniverse’s perspective as one of the more important independent voices of news and data specifically focused on ETFs.

Enjoy the insights, and, on behalf of all of us at IndexUniverse, may you all have a happy and prosperous new year.


Matt Hougan, President of ETF Analytics; Global Head of Editorial, IndexUniverse:

There are lots of choices for the biggest ETF story of 2011, from the regulatory inquiries, to the HOLDRS acquisition, to the growth of international fixed income, to Pimco's Total Return ETF filing. It’s been quite a year.

But I'm going to go outside the usual for my top story choice and pick the Vanguard Total Bond Market ETF (NYSEArca: BND) passing the iShares Barclays Aggregate Bond Fund (NYSEArca: AGG) as the largest bond ETF by assets. On the one hand, it's a random data point; on the other hand, it speaks to a major trend, which is the commoditization of the "pure beta" section of the ETF industry.

The ETF industry seems to be dividing in two.

On the one hand you have simple, market-cap-weighted beta exposure, where there’s a race to the bottom in fees, and investors are willing to switch products to save a few basis points. That’s partly why you see Vanguard growing so quickly, and firms like Schwab and others starting to gain share as well.

On the other hand, you have a new and dizzying array of complex strategy ETFs that charge high fees to execute institutional-style strategies—funds like the Barclays S&P Veqtor ETN (NYSEArca: VQT), which rotates between S&P 500 exposure, short-term VIX futures exposure and cash, and which somehow has gathered $100 million in assets.

I think this is a trend that’s here to stay, with a group of extraordinarily low-fee ETFs competing for beta exposure, and a group of high-fee funds competing (essentially) against active mutual funds.  The resulting fee wars can only be good for investors.

As for 2012, I the biggest headline of the year is: "ETF Assets Jump 30 Percent."

I think ETFs are closing in on critical mass, and that we are setting the stage for a massive growth in assets.

More mainline fund companies are lining up to enter the ETF space; firms like Pimco and Vanguard are getting increasingly serious about ETFs; and advisors as well as retail investors are just starting to "get" ETFs, to the point where they are becoming the default choice ahead of single stocks, mutual funds or closed-end funds.

If we get any sort of reasonable growth in the markets, I think 2012 could see a significant jump in ETF assets, probably the largest dollar jump in the history of the industry.


Elisabeth Kashner,  Senior Vice President of Analytics, IndexUniverse:

This year was about the man who cried wolf, the wolf at the gate and the cost of protection.

There are plenty of risks lingering in ETFs, and it’s too bad the Kauffman Foundation’s Harold Bradley’s ill-prepared Senate testimony on ETF risks pointed to nonexistent threats, because we could use some well-crafted regulation. Europeans had a better time of it, with well-deserved regulatory attention to counterparty risk that made us all pay more attention to issues like settlement risk, securities lending and failure to deliver.

ETF issuers responded to last year’s concerns by bringing out several contango-management commodities funds as well as volatility-tracking products. Too bad the volatility trackers don’t really track volatility! With a fund count of 1,370 and over $1 trillion in AUM, ETFs had another year of stellar growth.

What should we look for in 2012? Maybe some continued mergers and acquisitions action, like we saw with Market Vectors’ acquisition of best-of-breed HOLDRS. Maybe we’ll see further forays into alternatives, which grew like a weed this year. Or maybe 2012 will be the year of consolidation, as issuers conclude that market saturation and competition on fees makes rationalization and specialization attractive. And don’t forget the Securities and Exchange Commission. Will anyone look to ETFs for fresh campaigning material?


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