When You Wish Upon An ETF

April 05, 2006


ETF designers: Listen up! Your customers have spoken.

A few weeks ago, I was daydreaming at the office and pulled together a list of all the exchange-traded funds (ETFs) I would launch if I were in charge of the ETF industry. My picks ranged from Brazil funds to "enhanced" international funds to funds tracking S&P's "5-STAR" portfolio. I thought it was a fun and useful exercise, so when I published the article, I asked readers to send in their own suggestions.

Boy, did you respond. The emails piled in by the dozen. Investors and advisors, it seems, know what they want - and they want it now. The emails were filled with exclamation points, fairly in-depth analyses, and questions about why it's taken so long to get these funds to market.

Not surprisingly, the readers' list is more interesting and relevant than my own - thanks for the ideas.

Without further ado, here are the most popular (and interesting) suggestions...

International Small Cap (Plus Value)

One thing is clear: Investors want an international small cap ETF.

More than one-quarter of the readers who submitted suggestions said that an international small cap ETF was their top priority. Many of these readers were interested in a fund with a value slant, showing that the old Fama/French small/value tilt still has a strong grip over index investors, and that they are eager to take that philosophy overseas.

Fortunately, investors may not have to wait long for their hopes to be realized. As one of our readers pointed out recently on our discussion boards, the recent WisdomTree ETF filings include an "International Small Cap Dividend" ETF. That fact went almost unnoticed in the media coverage of the WisdomTree filings (including by me), but it could easily be the most popular ETF out of the twenty funds WisdomTree filed to launch.

Along the lines of international small cap ETF, a number of readers also asked for a small cap fund focused on Emerging Markets.

Global ETFs - Stocks and Bonds

Investors want one-stop shopping, and in today's world, that means a global ETF. Readers said that the dividing line between U.S.- and non-U.S. markets is increasingly irrelevant, and that they would like to buy instant diversification with a single fund offering exposure to the global equities market. There was also a call for a global bond fund.

Currently, the closest U.S. investors can get to a truly international ETF is the iShares S&P Global 100, a large-cap global ETF that tracks the 100 largest multinational firms. But that index falls far short of true diversification, given its large-cap and U.S. style tilts.

European investors have it better - a number of ETFs exist that are tied to the MSCI World Index. But even those fall short, as the World index is exclusively focused on developed markets. Investors are looking for total coverage here.

Another interesting play on the globalization theme came from a reader who suggested developing an ETF tied to the countries with the most business friendly climates. A number of sources publish these lists, including Forbes and the IMF.

"I think it would be great to have a long-term investment in countries that understood the benefits of globalization, and best knew how to attract investment," the reader said.

It would indeed.

International Sectors

Sticking with the international theme, there was a lot of call for international sector ETFs. Investors suggested funds tied to international real estate, natural resource companies, water companies, and timber, but the idea could apply to anything from banks to pharmaceuticals. As globalization continues to take hold, and as markets become increasingly integrated, we'll likely see these kind of funds develop.

One-Stop Asset Allocation

One of the more interesting proposals I received was for a one-stop "asset allocation" ETF. Somewhat like a target date fund, or a fund of funds, this fund would hold a balanced mix of equities and other asset classes (international and U.S. stocks, REITs, commodities, bonds, etc.), and would automatically rebalance on a regular basis. Like the "global" fund, this would give investors a "set-it-and-forget-it" option in the ETF universe.


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