How to Play 2013's Top ETF Trends
In a new blog post, Dodd Kittsley, Head of Global ETP Market Trends Research for BlackRock (NYSE: BLK), identifies four prominent trends the exchange-traded products industry could see in 2013. One of the trends, that being double-digit asset growth for the industry at large, is a broader theme. Isolating individual ETFs and ETNs that can benefit from industry-wide asset growth is tricky.
However, the three other trends Kittsley highlights can easily be exploited through individual ETFs. That list starts with...
Robust Interest in Bond Funds This is an extension of a prominent 2012 theme. As Morningstar noted earlier this month, U.S. bond ETFs hauled in $3.8 billion in inflows in November to bring the year-to-date total through the end of November to $48 billion.
"Bond ETPs account for 31% of all year-to-date industry flows, up from 12% in 2008," said Kittsley.
If a fiscal cliff resolution is not passed before the January 1, 2013 deadline, investors could flee stocks and equity-based ETFs for the comfort of bond funds. The PIMCO Total Return Bond ETF (NYSE: BOND), which has been the most successful new product launch of 2012, has the advantage of being known as the "Bill Gross ETF." That could spark inflows in a turbulent environment for stocks and other risky assets.
Assuming 2013 starts on a risk off note, that could cap upside for high-yield bond funds, but investors' need for yield is not likely to diminish. That could make the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSE: LQD) attractive.
Another ETF to consider is the WisdomTree Emerging Markets Corporate Bond Fund (NASDAQ: EMCB). With over $96.2 million in AUM, EMCB is a successful 2012 ETF launch in its own right. Roughly 70 percent of the fund's holdings are rated investment-grade and the ETF has a 30-day SEC yield of 3.61 percent, 85 basis points higher than LQD's 30-day SEC yield.
Increased Use of Volatility Products Again, this is an extension of a 2012 theme. Arguably, the volatility ETF movement kicked off in 2011 with the debut of the PowerShares S&P 500 Low Volatility Portfolio (NYSE: SPLV).
SPLV is now the gold standard of volatility ETFs with almost $3.1 billion in assets under management and this ETF's success has sparked a wave of new product introductions aimed at capturing share in a market segment that has proven wildly popular with investors.
Other low volatility ETFs that could see strong inflows in the new year include the PowerShares S&P 500 High Dividend Portfolio (NYSE: SPHD), which debuted just two months ago and already has $28 million in AUM. SPHD is home to 50 stocks "traded on the S&P 500 Index that historically have provided high dividend yields and low volatility," according to PowerShares. That gives the ETF a 30-day SEC yield of 4.74 percent.
Investors looking to put the "low vol" theme to work for them in the emerging markets have choices as well. Given the rapid success of the iShares MSCI Emerging Markets Minimum Volatility Index Fund (NYSE: EEMV), which has attracted $840 million in AUM in just 14 months of trading, it would not be surprising to see more inflows to this sub-sector of the low vol ETF universe.
An alternative to EEMV is the PowerShares S&P Emerging Markets Low Volatility Portfolio (NYSE: EELV). EELV debuted in January and spent several months living a fairly anonymous existence. Over the last few months, however, investors have woken up to EELV's story and the fund's AUM total has jumped to $87.4 million.
More Inflows For EM Bond Funds "In 2012, demand for this class of ETPs doubled to $20 billion. The category now accounts for 6% of the fixed income ETP universe, up from less than 2% going into 2010," according to Kittsley.
Indeed, it feels like hardly a week has passed in 2012 without news of another emerging markets bond ETF seeing remarkable inflows. Of course, this has sparked the predictable talk a bubble in emerging markets bonds.
Part of the bubble talk revolves around the fact that companies in the developing world issued $258 billion in corporate debt this year. That is more than double last year's level, according to the Wall Street Journal. The problem with calling that a bubble is that the appetite is there on the part of global investors to absorb new issuance in 2013 a rate similar to what was seen this year.
The aforementioned WisdomTree Emerging Markets Corporate Bond Fund should benefit from increased appetite for EM corporate debt. Risk takers can consider the Emerging Markets High Yield Bond ETF (NYSE: HYEM), which features dollar-denominated junk bonds from developing world corporate issuers.
Of course, it cannot be forgotten that ETFs tracking emerging markets sovereign debt have longer track records than their corporate counterparts and have been inflow leaders this year. Sovereign debt issuance in the developing world has also been high this year at $85 billion, but that has not been the primary reason investors have embraced this asset class.
The biggest reason why inflows to dollar-denominated ETFs such as the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSE: PCY) have been so robust is yield. PCY offers a 30-day SEC yield of 3.92 percent with the comfort of a dollar-based asset and the potential for capital appreciation as more developing nations see their sovereign ratings boosted.
Not to be left out of the equation are ETFs that give investors exposure to bonds denominated in local currencies. This group includes the Market Vectors Emerging Markets Local Currency Bond ETF (NYSE: EMLC), the iShares Emerging Markets Local Currency Bond Fund (NYSE: LEMB) and the actively managed WisdomTree Emerging Markets Local Debt Fund (NYSE: ELD).
Local currency debt accounted for 85 percent of the total emerging markets bond market in 2011, according to the Financial Times and investor interest in local currency bonds continues to increase as some developing nations sport better balance sheets than their developed world counterparts.
Local currency bond ETFs have also held up well in the face of the fiscal cliff. Led by EMLC's 2.33 percent gain, all three of the local currency bond funds mentioned here are up since November 7.
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