2013 was a great year for the ETF industry, thanks to strong flows
in equity funds, a host of new launches, and demand for low cost
products. Due to these trends, assets under management for the
total industry crossed the $1.6 trillion level, while the total
number of funds surpassed the 1,500 mark.
And 2014 is shaping up to be a solid year too, as many investors
remain reasonably bullish on the economy, while Europe is also
surging back. Assuming that the QE taper doesn't impact the economy
too much, there is plenty of reason to think that stocks can march
a bit higher this year as well (see
7 ETFs to Buy in 2014
Yet even with this solid backdrop, the ETF industry could be in for
some surprises this year. There are plenty of untapped markets out
there, while there are at least a few dozen funds that have failed
to capture investors' interest on the other side of the coin.
Given this, it could be a rocky year for some issuers, though
others seem well positioned to take advantage of the market trends.
In particular though, we look for the following five predictions to
come true for the ETF industry, and dominate the news cycle this
New Income ETFs Dry Up
Despite the taper threat, new income ETFs continued to hit the
market. A plethora of new products with an income focus launched in
2013, giving investors a variety of options to target
income-investments be they in the form of covered-calls, dividend
growth, or dividend quality.
While these have been welcomed additions to many investor
portfolios, you have to wonder how many more the market can hold.
We have already seen a few launched from First Trust in 2014, and I
am skeptical that the market will be able to stomach too many more
3 Best Dividend ETFs of 2013
For example, in just the last two months of 2013, investors saw
several ETFs hit the market with an income focus. These include a
variety of strategies such as the
Cambria Foreign Shareholder Yield ETF (
Horizons S&P Financial Select Sector Covered Call ETF (
, and the
ETRACS Monthly Pay 2xLEveraged Closed-End Fund ETN (
, just to name a few.
The intense flow of income ETFs slows to a trickle, especially as
competition heats up and rates continue to rise.
Emerging Markets Rebound
Although flows into equity products were pretty intense for
U.S.-focused funds, emerging markets saw heavy outflows.
, the two most popular emerging market funds on the market, were
the biggest losers in terms of assets with each losing more than $8
billion. Other emerging market funds also led the list of the
biggest outflows as concerns over the taper, a strong dollar, and
growth prospects hampered these securities.
However, many of these emerging markets have stabilized in recent
trading, and with strength projected in key markets like China,
they could be due for a rebound. Plus, with developed markets
performing so well, it could lead to some serious strength for
exporters in the developing world.
Emerging Market ETFs will see a rebound, and solid inflows for
Senior Loan ETFs Become More Common
Even with heavy bond losses, fixed income investing was relatively
popular among investors. And with the advent of senior loan ETFs,
many found a new favorite way to invest in bonds (Read
Senior Loan ETFs: The Best Bet for Rising
That is because these senior loan securities give exposure to fixed
income, but greatly reduce interest rate risk. This makes these
securities perfect in rising rate environments, while still paying
out a solid level of income to investors.
Investors really embraced this approach in 2013, as
saw the most inflows out of any bond ETF, while its competitors-
-all saw decent interest too. I think this trend will continue in
2014, and that we will see more funds, and segmentation, in this
in-focus corner of the bond world.
Senior Loan ETFs will stay hot, especially if rates continue to
Niche Strategy ETFs Will Surge in Popularity
Although broad market funds did quite well in 2013, so-called niche
strategy ETFs stole the show and actually outperformed. These
include funds that focus on items like
, all of which easily beat the S&P 500 over the past year. In
fact, all three have seen gains more than 40% over the past year,
compared to a nearly 28% for SPY in the same time frame (See
Best ETF Strategies for 2014
These saw decent levels of interest from investors in 2013, but I
think this will really pick up in 2014. After all, all three of the
aforementioned funds have a solid methodology and have shown a
history of outperformance, two factors which are likely to attract
more assets in the months ahead.
After a great year, investors will really start to take note of
niche strategy ETFs.
New product launches hit 100, so do closures
While the focus might not be on income funds in 2014, there will
undoubtedly be a number of new niches that are targeted by ETF
issuers. There are hundreds of funds already in the pipeline, and
more mutual fund companies will likely dip their toes into the
and other surging issuers will also look to expand their lineups,
making further inroads in this competitive industry, and pushing
total funds launched over 100 again this year.
However, I think we will see a big round of closures too in 2014.
Issuers will finally see the writing on the wall for many
underperforming funds which have failed to attract assets despite
pretty favorable conditions. So while 2013's closures might have
been around 60, I look for 2014's total to get back closer to
2014's level and cross the 100 mark.
ETF launches remain at a solid pace, though closures will pick up
as underperforming funds fall by the wayside.
Want the latest recommendations from Zacks Investment Research?
Today, you can download
7 Best Stocks for the Next 30 Days
Click to get this free report >>
Author is long CSD.
PWRSH-SNR LN PR (BKLN): ETF Research Reports
ISHARS-EMG MKT (EEM): ETF Research Reports
CAMBRIA-FRN SHR (FYLD): ETF Research Reports
PWRSH-BYBK ACHV (PKW): ETF Research Reports
VANGD-FTSE EM (VWO): ETF Research Reports
To read this article on Zacks.com click here.
Want the latest recommendations from Zacks
Investment Research? Today, you can download 7 Best Stocks for the
Next 30 Days. Click to get this free report