Want exposure to social media? There's an exchange-traded fund for that. How about airlines, hedge funds and frontier markets? There are ETFs for those too. In fact, industry executives say that the next wave of ETF growth will come from a wide variety of relatively new and niche funds holding their own as demand for the easy-to-buy and easy-to-sell funds keeps picking up.
At the end of May there were 1,465 U.S. listed exchange-traded funds and notes, an increase of 17% compared to 1,254 U.S. listed products at the same time last year. And assets in those ETFs and exchange-traded notes totaled some $1.14 trillion, an increase of 2.7% over May 2011 month-end, when assets totaled $1.11 trillion, according to data from the ETF Industry Association.
Last November, Global X launched the Global X Social Media Index ETF (SOCL), which tracks the Solactive Social Media Index. The fund's top three holdings include Tencent Holdings Corp., a Chinese holding company whose subsidiaries provide Internet and mobile phone value-added services, LinkedIn Corp. and Facebook Inc. At last glance, the $17.5 million fund was down 12.86% since inception on November 14, 2011. The fund charges an annual management fee of 65 basis points.
CEO Bruno del Ama says the fund will ride its long-term mandate out to the next decade. "We focus on the long-term secular trends that we think will shape the market in the next decade and we expect social media to perform better than the overall economy in the next decade," he says.
"We think it is very early in the development of the social media sector and, in a lot of ways, a lot of these businesses are the ultimate monopoly. The reason why we go to places like LinkedIn and Facebook is not necessarily because they have the best technology but because our friends or business relationships are there, and replicating that is very, very difficult."
Global X is also the purveyor of the Top Guru Holdings Index ETF, which tracks the positions of hedge funds via their quarterly 13F filings. Del Ama says the fund is meant as an access point to what the pros are buying, not to the pros themselves.
"A lot of people are talking about the next phase of the industry going from passive, market-cap based indices to smarter indices that generate from sort of alpha," he says. "You're not buying the securities at the same day but you're buying the securities that they still hold and are likely to hold for several quarters."
Want to invest more like a hedge fund manager, especially a short seller? Enter the AdvisorShares Active Bear ETF, which sells short domestically traded equity securities and is sub-advised by Ranger Alternative Management, L.P. It also has the distinction of being the only actively managed "short-only" ETF in the Morningstar database.
Brad Lamensdorf, co-portfolio manager of the AdvisorShares Active Bear ETF, says he and his partner, John DelVecchio, were running a short-only hedge fund, which had one of the best performances in the U.S., but were frustrated because their assets weren't growing.
Last January, AdvisorShares launched the ETF and tapped the pair to subadvise the fund. Year-to-date, the $274 million fund is down 2.84% but it has had a good run in the last three months returning 16.4%. It sports a management fee of 150 basis points.
Lamensdorf says the fund has a turnover rate of several hundred percent a year on a dollar basis and uses a lot of sentiment including put/call ratios and all of the polls that come out weekly to determine how many people are bullish and bearish in the marketplace to construct its portfolio. Currently, the fund is 90% invested with 10% in cash.
"There's a massive need out there for this type of product and our asset traction can be tracked back to compliance officers approving our product at the major brokerage houses," he says. "We were at $50 million in August 2011 and when Morgan Stanley approved us, we were at $150 million by year-end. UBS approved us in January and all of a sudden we're at $275 million. We've had good performance but some of this business has to do with distribution as well."
Tony Davidow, managing director and portfolio strategist at Guggenheim Investments, says ETF growth will accelerate, through broader acceptance of ETFs by advisors and continued product innovation.
"The first phase of ETF growth came from providers offering 'cheap beta' solutions," he says. "These were generally strategies designed to mimic the broad market indexes in a cost-effective manner. We believe that the next wave of growth will likely come from gaining access to unique market segments or asset classes (i.e., China, commodities, currencies, etc.), and 'Better Beta' strategies (i.e., improving upon the traditional market benchmarks).''
In the area of better beta, Davidow says advisors are seeking alternative weighting methodologies, such as "equal weight" and "fundamentally weighted" strategies, as a means of gaining exposure to market segments. Rather than the traditional cap-weighted strategies that overweight the largest companies and underweight the smaller ones, equal weight strategies allow each company to contribute equally from a risk-return perspective, allowing for the smaller companies in the index to contribute more to the overall results, he says.
"Research has shown that many of these alternative weighting methodologies have outperformed their cap-weighted equivalents over longer intervals," he says.
According to Davidow, fixed-income ETFs are still relatively new, and offer an alternative to buying individual bonds or fixed income mutual funds. Enter Guggenheim's "bullets."
"Our target maturity ETFs, BulletShares, provide the best attributes of each. BulletShares provide individual bond characteristics, with a target maturity, and the diversification advantages of a pooled-product," he offers.
To be sure, not all gimmicky ETFs have a long shelf life. Davidow's firm in February disclosed that eight exchange traded products were slated to close in March in order to focus its resources on products "that have demonstrated the most marketplace demand."
The eight offerings that accounted for some $105 million in assets, or less than 1% of Guggenheim Investments' total $11.9 billion in exchange-traded assets, as of March 23, include: CurrencyShares Russian Ruble Trust (FXRU); CurrencyShares Mexican Peso Trust (FXM); Guggenheim EW Euro-Pacific LDRs ETF (NYSE Arca: EEN); Guggenheim International Small Cap LDRs ETF (NYSE Arca: XGC); Guggenheim Ocean Tomo Growth Index ETF (NYSE Arca: OTR); Guggenheim Ocean Tomo Patent ETF (NYSE Arca: OTP); Guggenheim Sector Rotation ETF (NYSE Arca: XRO) and Rydex MSCI All Country World Equal Weight ETF (NYSE Arca: EWAC).
Going forward, Davidow says all asset management companies will likely need to have an ETF strategy or risk being left behind. "There will always be a role for mutual funds, but it'll be more common for firms with mutual fund companies to also have ETF families," he says.
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