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You might think the wild markets of the last year would have made ETF sponsors slow down a bit, but they kept on cranking out new products — some great, some not.
By my count, a total of 136 new exchange-traded products (ETFs, exchange-traded notes, and assorted hybrids) came on the market in 2009. At the same time, 56 ETFs and ETNs were liquidated, leaving a net increase of 80 for the year. (You can see the full list by clicking here.)
Today I want to focus on a handful of these new funds that I think were especially interesting. When I say “interesting,” it doesn’t necessarily mean I endorse these funds. As you’ll see, I think some of them are useless and potentially dangerous. Even so, they’re still interesting.
Let’s jump right in …
Interesting New ETF #1:
Market Vectors Brazil Small Cap (BRF)
For years, emerging markets funds included only the local “blue chip” large-cap stocks. Now we have BRF to focus on the smaller stocks.
The fact that Brazil was the first to get its own small-cap ETF was no accident. The only other Brazil ETF, iShares MSCI Brazil (EWZ), is dominated by large energy, mining and steel companies. All of these are highly dependent on exports to the developed world.
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| BRF is the key to Brazil’s fast-growing domestic economy. |
BRF gives you access to smaller companies that serve Brazil’s booming domestic economy — which is growing fast, too. I’m really glad to have BRF available and hope to see similar funds covering other Brazilian markets.
Interesting New ETF #2:
EGS Dow Jones Emerging Markets
Financials Titans Index Fund (EMT)
EMT does not hold small-cap stocks. In fact, as the name suggests, this fund holds companies that can be considered “titans,” at least by emerging market standards.
What makes EMT interesting is that it was the first sector-based ETF to specialize in emerging markets. Banking and financial stocks from places like China, Brazil, and South Africa make up most of the portfolio. This is a fund with a lot of potential.
Interesting New ETF #3:
Grail American Beacon Large Cap Value (GVT)
Never heard of GVT? Don’t feel bad; very few people have. Yet its introduction last May was a milestone in ETF history. GVT is the first actively-managed equity ETF that is a clone of a traditional mutual fund. Instead of tracking an index that changes only rarely, GVT has a manager (American Beacon) who decides what stocks to buy and sell, and when to buy and sell them.
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In this regard, GVT is a lot like a conventional mutual fund — and that’s why it hasn’t attracted much attention. If you want professional management, would you rather go with an established fund or be the first to try an untested new format? GVT hopes to help you answer that question in the future.
I’m glad GVT blazed the trail. But I’m not sure the market is ready for this sort of product just yet.
Interesting New ETFs #4 and #5:
MacroShares Major Metro Housing Up (UMM), and MacroShares Major Metro Housing Down (DMM)
These were quite possibly the most over-hyped ETFs ever introduced. In fact, they aren’t even ETFs. They are a strange hybrid product that is difficult to categorize. The intent was to give investors a way to trade an index of housing prices in major cities, either long or short.
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| No one knows what this house is really worth. |
Unfortunately, the MacroShares design was flawed in several critical ways: UMM and DMM did not track the Case-Shiller index they were supposed to follow, never attracted significant assets, and were liquidated in late December. Earlier this week, Robert Shiller was on CNBC and said “it was a mistake,” but they intend to try again.
Interesting New ETF #6:
IQ Hedge Multi-Strategy Tracker (QAI)
If nothing else, this one may win the award for most mystifying fund name of the year. QAI seeks to give small investors a way to participate in sophisticated trading strategies that were previously only available in high-minimum hedge funds.
Is QAI the same thing as a hedge fund? No, not exactly. The ETF format still lacks the go-anywhere, do-anything flexibility available to the wealthiest investors.
On the other hand, that may be a good thing … we saw as recently as last year that hedge funds can lose money, too. And when they do, it tends to be a LOT of money. Nonetheless, QAI may be a good diversification tool for long-term investors.
Interesting New ETF #7:
Market Vectors Vietnam (VNM)
2009 was the year that ETF investors got their first individual country access to the so-called “Frontier Markets” — countries that are just starting to develop modern economies. VNM is the first single-country ETF dedicated to a frontier market.
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| VNM was the first ETF to focus on Vietnam. |
Vietnam, you may recall, is one of the “Next 11” nations I wrote about in last week’s Money and Markets column. Expect a lot of volatility, but I think VNM will turn into a long-term winner.
Interesting New ETNs #8 and #9:
iPath S&P 500 VIX Short-Term Futures ETN (VXX), and
iPath S&P 500 VIX Mid-Term Futures ETN (VXZ)
As they used to say on the Monty Python show, “Now for something completely different.” Rather than follow market direction, VXX and VXZ are intended to follow market volatility. In plain English, they track the amount of fear in the market. When times are crazy and people are afraid, VXX and VXZ should do well.
The downside to VXX and VXZ is that they are extraordinarily complicated investments. I usually tell people not to invest in products they don’t understand. Another potential problem is that they are exchange-traded notes rather than exchange-traded funds. This carries some unique risks that I explained in detail last February.
If you have experience trading futures and options, you might find VXX and VXZ useful. Otherwise, I would leave these to the professionals.
Will 2010 bring even more interesting ETFs and ETNs? Probably so. And you can bet I’ll be watching closely.
Best wishes,
Ron
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