The top-selling ETF strategies? Investors seeking risk for reward

Jul 17, 2011 @ 12:01 am

By Jessica Toonkel

Asia local debt, managed futures and senior loans were among the top-selling strategies among new ETFs in the year's first half, a sign that investors are turning to more complicated — and in some instances riskier — asset classes to seek returns in today's markets.

“People are saying, "Give me something other than Treasuries and U.S. stocks,'” said David Nadig, director of research at IndexUniverse.com. “But they better go in with their eyes wide open.”

WisdomTree Investments Inc.'s Asia Local Debt ETF Ticker:(ALD), which was launched in March, tops the list of exchange-traded-fund launches for the year, with $470.98 million in net flows as of June 30, according to IndexUniverse. The firm's Managed Futures Strategy Fund Ticker:(WDTI), which went live in January, saw $194.72 million in net flows for the same period.

Both ETFs were the first of their kind, which is very important in the ETF market, said Jonathan Steinberg, chief executive of WisdomTree.

The Asia Local Debt ETF's success also shows that investors are more willing to go outside of the U.S. for yield, said Tom Lydon, president of Global Trends Investments.

“Ten years ago, investing outside the U.S. was deemed aggressive or too risky,” Mr. Lydon said. “But with technology, the greater interaction of the markets and with yields greater in Asian markets, it makes sense to diversify a bit.”

WisdomTree has seen an increase in interest in emerging markets overall, but particularly in Asia, Mr. Steinberg said. Sixty percent of the firm's assets are in emerging markets.

The success of WisdomTree's managed-futures ETF shows that investors are looking for noncorrelated returns, experts said.

“The alternatives theme is really resonating with people right now, and managed futures was one of the few hedge fund strategies that not only held up but performed well during the market disruption,” said Scott Burns, an analyst at Morningstar Inc. In 2008, Morningstar's Systematic Futures Hedge Fund Index, which tracks managed-futures strategies in hedge fund wrappers, returned 18.1%, compared with -37% for the S&P 500 Total Return Index.

Overall, the top 10 ETF launches for the first half of 2011 seem to indicate that investors are gravitating to portfolios that will be immune to volatility in the U.S. equity markets, said Christian Magoon, an ETF consultant.

For example, the ProShares VIX Short-Term ETF Ticker:(VIXY) and ETF Securities Physical Asian Gold ETF Ticker:(AGOL) saw $64.58 million and $54.59 million in net flows, respectively, as of June 30.

Income generation is another prevalent theme among the top-10 ETF launches this year.

Four of the 10 top-selling ETFs in 2011 — WisdomTree Asia Local Debt, the PowerShares Senior Loan ETF Ticker:(BKLN), the iShares Dividend Equity ETF Ticker:(HDV) and the Schwab U.S. REIT ETF Ticker:(SCHH) — aim to produce income for investors.

DESIRE FOR SAFETY

“There is definitely a growing trend toward having a safe haven,” Mr. Magoon said. “Given the worldwide events that continue to roil the markets, people want some kind of portfolio bomb shelter allocation.”

But despite the trend away from U.S. equities, The Charles Schwab Corp. and The Vanguard Group Inc. were able to launch equity-oriented growth ETFs that made the top 10.

Vanguard's Total International Stock ETF Ticker:(VXUS), which went live in January, came in third in fund flows for ETF launches as of June 30, bringing in $193.92 million, according to IndexUniverse.

Schwab's U.S. Mid-Cap ETF, which also was launched in January, ranked seventh, bringing in $73.82 million.

Mr. Magoon attributes the success of these two launches to the funds' low expense ratios — 0.2% in the case of Vanguard and 0.13% for Schwab.

But Mr. Nadig believes that the firms' success with these launches has more to do with investor loyalty than low costs.

“Advisers and investors will build their entire portfolios around Schwab or Vanguard,” Mr. Nadig said. “They have very strong followings.”

In the first half of 2011, there were 184 ETF launches, up from 100 for the comparable period last year, according to IndexUniverse. Of the total this year, 112 were equity ETFs. Despite the existence of 1,290 ETFs, observers believe that more are likely to be launched.

“Everyone knows that the next trillion is going to come into ETFs faster than the first trillion did, and so to compete, firms need to have products in every asset class, or at least in all the major ones,” Mr. Lydon said.

Since the majority of this year's launches were the first of their kind, the ETF landscape still has room for innovation, Mr. Nadig said.

“People have been questioning where anyone could possibly launch a new ETF,” he said. “But many of the firms on the [top 10] list are targeting corners of the market that have been underrepresented.”

E-mail Jessica Toonkel at jtoonkel@investmentnews.com.

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