In 2009, the exchange-traded fund (ETF) industry recovered from its first significant contraction since its birth in 1993. As the stock market rallied, dollars poured into ETFs and by the end of the year the industry boasted more than $700 billion in assets, according to the Investment Company Institute (ICI), a national association that represents U.S. investment companies.
However, that growth was selective. While assets under management and the number of ETFs offered by the investment community rose in 2009, volumes fell. Indeed, the average daily volume of the ETFs in Futures’ 2010 ETF Guide was nearly 2 million units less than the year before. Although funds were flowing, activity was slowing. In addition, although investors returned to all asset classes that year, bond ETFs more than doubled to $107 million while domestic equities grew by less than a third.
In 2010, asset growth not only continued, it did so broadly. Nearly all sectors surged by healthy rates, while the drop in average daily volume for the funds that are included in Futures’ 2011 ETF Guide leveled off. And that growth was steady, powering higher throughout the year (see "High-octane recovery," below).
The ICI reports that ETF assets increased to $927.62 billion by November 2010, a rise of $189.70 billion or 25.7% over November 2009. Domestic equity ETFs attracted a large part of those funds, increasing by $96.19 billion since November 2009. International market ETFs, which along with bond ETFs also recovered strongly in 2009, attracted an additional $56.66 billion in 2010. At the end of November 2010, bond funds held $140.97 billion and hybrid funds held $312 million (see "Across the board," right).
Futures’ ETF Guide includes all ETFs that traded more than 100,000 units a day, on average, the last quarter of the previous year. Based on that period in 2010, 342 ETFs made the cut (out of 920 available at the end of the year). In 2009, 294 ETFs were included in the Guide. With ETF activity spread out across an increasingly broader base, however, the average daily volume of all the ETFs in the Guide continued to thin out, sliding about another 1 million units a day in 2010.
The ETF terrain continued to shift in 2010, reflecting the changes in the industry.
One ETF sector that continues to evolve is commodities. Commodity-linked ETFs saw some significant shifts. The last quarter of 2010, the most popular commodity-linked ETF was the iShares Silver Trust (SLV), which had an average daily volume of 28.98 million units a day. The leader the previous year, the United States Natural Gas (UNG), slipped to second on the list with an average daily volume of 25.92 million units.
Energy and metal ETFs dominated the top of the charts in the commodity sector. Of the top 15 commodity-linked ETFs in the last quarter of 2010, only two were not energy or metals related. The Materials Select Sector (XLB), which also includes chemical, packaging and construction companies in addition to some mining firms, came in at number six, while the PowerShares DB Agriculture (DBA) broke through at number 14.
While the top ETF in international and emerging markets remained the iShares MSCI Emerging Markets Index (EEM), it slipped in volume, recording 57 million units a day to close out 2010 vs. about 71 million in 2009. The iShares products led this sector with authority, once again claiming nine of the top 10 spots in this category. As in 2009, only the Vanguard Emerging Markets Stock (VWO) was able to make inroads, coming in fifth on the strength of its 16 million units a day.
With the stock market recovering strongly in 2010, bear market ETFs expectedly fell in volume. In the last quarter of 2009, the Direxion Daily Financial Bear 3X Shares (FAZ) was trading 65 million units a day. As 2010 wrapped up, FAZ was turning over just 33.14 million units a day. The slowdown in the top bear market ETF volumes didn’t translate to less-popular funds, however. In the current ETF Guide, 44 bear market ETFs made the 100,000 unit-per-day cutoff. Last year, the ETF Guide included 36 of these products.
As it was in 2009 — and 2008 — the most active ETF in 2010 was the Standard & Poor’s Depository Receipts (SPY), which tracks the S&P 500. The ETF traded a hair less in 2010 compared to what it did in 2009, 158.98 million units vs. 160 million the year before. There was a new number two on the list, however, with the Financial Select Sector SPDR (XLF) and its 79 million unit volume taking the spot from the PowerShares QQQ (QQQQ), which slipped to third with volume of 61.99 million units a day.
Following the U.S. dollar, the top currency ETF was the PowerShares DB U.S. Dollar Index Bullish (UUP), trading 5.1 million units a day. The CurrencyShares Euro Trust (FXE) was the second most popular forex fund, while the WisdomTree Dreyfus Chinese Yuan (CYB) came in third.
The CYB is a notable success story in actively managed ETFs. It was launched in May 2008 and helped kick off a trend that gained some momentum in 2009. It’s joined in the ETF Guide by the actively managed WisdomTree Dreyfus Emerging Currency (CEW) and WisdomTree Dreyfus Brazilian Real (BZF).
Another leading company in actively managed ETFs, AdvisorShares, also continued to add to its listings, filing at the end of 2010 for three more funds, the Madrona Forward Domestic (FWDD), which will analyze earnings expectations; the Madrona Forward International (FWDI), which will attempt to outperform the MSCI EAFE index; and the Madrona Forward Global Bond (FWDB), which will adjust its holdings in 12 distinct bond classes using yield-curve analysis.
2011: Speculative growth?
One of the biggest stories in trading the last year has been the evolving regulatory framework. Lawmakers have responded to the 2008 financial crisis with a list of new laws and expectations for regulators. While OTC derivatives and more complex institutional products have received the most attention, retail products, such as ETFs, are not immune to scrutiny.
The regulations most likely to affect the ETF market are position limits. The Dodd-Frank financial reform legislation required the Commodity Futures Trading Commission (CFTC) to have energy and metals market position limits in place by January — a deadline missed. However, on Jan. 13, the CFTC did vote to open the position limit proposal to public comment.
How the regulations will impact the retail ETF market is unclear. Major players, such as Blackrock, which operates the iShares ETFs, have vigorously lobbied against restrictive limits.
Leveraged ETFs are another area that has drawn regulatory attention. Indeed, in early 2010, the Securities and Exchange Commission restricted the listing of new leveraged ETF products. As is obvious from the funds flowing into these products, however, investors aren’t ready to turn their back on leveraged ETFs just yet.
Accessibility is an ETF trend that is likely to continue. TD Ameritrade is the latest retail securities broker to offer commission-free ETF trading. It joins Charles Schwab, Fidelity and Vanguard as major retail players to waive commissions for some ETFs.
Despite massive changes to the regulatory framework in the United States, ETFs continue to persevere and have demonstrated value as a vehicle for both active speculation and passive investment. As the pieces fall into place, ETFs will be poised to take full advantage of a more-certain regulatory future.
What’s next with ETFs
By Daniel P. Collins
A few years ago when we spoke with Ivers Riley, the founder of the exchange-traded fund, he told us that the original concept for ETFs was a broad one encompassing multiple asset classes and products.
While initially the success of ETFs came from products on popular broad based indexes, each year has brought the product closer to that broader vision. In recent years we have seen the emergence of commodity-based ETFs, leveraged ETFs, bear market ETFs, currency ETFs and actively managed ETFs. Most recently that has extended to volatility and managed futures products.
In January ProShares entered the fray of volatility-based Exchange Traded Notes (ETNs), announcing the launch of two ETNs based on the Chicago Board Options Exchange Volatility Index (VIX) joining Barclays, Citigroup, UBS and VelocityShares with VIX-based ETNs.
Wisdom Tree Financial in January launched a managed futures ETF (WDTI), joining iShares, who launched its Diversified Alternatives Trust in 2009. Wisdom Tree’s ETF is a long/short ruled-based strategy that incorporates 24 exchange-traded futures following the DTI Index. Auspice Capital Advisors plans to launch an ETF in the first quarter that will follow its Managed Futures Total Return Index.
Offering retail access to managed futures has been extremely cumbersome because of the regulatory regime for commodity pools, which has led to the proliferation of managed futures mutual funds and now managed futures ETFs. Existing commodity trading advisors can offer their programs to retail investors more easily through one of these structures than the traditional commodity pool route. Auspice President Tim Pickering says managed futures ETFs will be more difficult because ETFs have to be based on a transparent benchmark. "You have to show the strategy," Pickering says.