In ETF March Madness, All Investors Win

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With March Madness in full swing, we thought it would be interesting to see just how the world of ETFs would look if it were an NCAA tournament bracket.

As you no doubt have heard, there is a little college basketball tournament taking place across the nation, and although the reported $10 billion-plus TV deal that comes with it is nothing to scoff at, the idea of an ETF tournament makes a ton of sense. After all, the ETF market is now nearly $1.5 trillion in size.

Before I continue, I wanted to point out that we're not the first to come up with the idea of applying the bracket idea to things other than college basketball. People have put together brackets on everything from famous movies to famous desserts. Even the idea of an ETF bracket has been done already by BlackRock.

The goal of this blog is not to pick winners, especially not those ETFs poised to provide the best returns over the next five days or five years, but rather to look at how different ETFs would fit into the common definitions used to segment college basketball programs in the bracket vernacular if we were trying to determine which ETFs would see the largest inflows over the next year.

If we were trying to determine which ETFs, on a percentage basis, were likely to be the big breadwinners-the ETFs to grow the most over the course of 2013-how would guys like Charles Barkley and Rex Chapman describe different funds?

The Powerhouses

These are the ETF equivalents of schools like Duke, Kansas and Kentucky (well, maybe not after that first-round exit in the NIT). In other words, these are teams that are perennial powerhouses whose ranking in the tournament is usually a big fat No. 1, with a margin of error of 2 at most.

The ETFs that fit this mold are easy to spot.

The SPDR S&P 500 ETF (NYSEArca:SPY) is the one that jumps off the page at you. Not only is it the oldest ETF on the market, it's more than twice as large as the next-biggest ETF on the market, the SPDR Gold Shares (NYSEArca:GLD).

SPY also tracks what is, regardless of its flaws, perhaps the most widely used benchmark in the world. As a result, when money is moving into and out of ETFs, SPY is the bellwether ETF. For SPY to end the year as the leader in inflows would surprise no one, just as a Duke national championship wouldn't come as a shock to anyone who hasn't been living under a rock since 1980.

GLD would certainly fit this billing as well, as would the Vanguard FTSE Emerging Markets Index ETF (NYSEArca:VWO) and the iShares MSCI Emerging Markets Index Fund (NYSEArca:EEM). In fact, VWO and EEM might be the perfect parallel for Duke and North Carolina. One, North Carolina/EEM, burst on the scene much earlier than the other, Duke/VWO, and yet both are now powerhouses in every sense of the word. As 2013 draws to a close, nobody in their right mind would be surprised to see either fund at the top of the inflows list.

The Mid-Conference Stalwarts

The schools that typically fall into this group are those that play in what is viewed as a smaller conference, such as the PAC-12. They may also be teams that play in what is perceived to be a big conference, like the Big-10, but are never considered to be a powerhouse.

Schools like Arizona, Wisconsin and West Virginia come to mind here. The ETFs that fit in this group would therefore be solid, if unspectacular, asset gatherers whose asset tallies are above $10 billion, but well below $40 billion.

Funds in this group tend to be a bit more specialized, like the SPDR S&P Dividend ETF (NYSEArca:SDY), which favors dividends; the iShares Russell 1000 Growth Index Fund (NYSEArca:IWF), which is a large-cap growth fund; or the Vanguard REIT ETF (NYSEArca:VNQ).

Other funds that fit in this group are asset classes that are reasonably new ETF concepts like high-yield bond funds such as the SPDR Barclays High Yield Bond Fund (NYSEArca:JNK) and the iShares iBoxx $ High Yield Corporate Bond (NYSEArca HYG).

Like the Arizonas and the Louisvilles of the world, nobody would be shocked if any of these funds ended up taking the crown this year, but they aren't necessarily expected to rule the roost year in and year out.

Just as one bad recruiting class can doom these programs to a No. 7 or No. 12 seed in the tournament, a poor year for REITs, high-yield debt or dividend payers can bump these funds squarely out of the national spotlight.

The Up-And-Comers

These are schools like Gonzaga or even New Mexico, whose tournament histories are undeveloped, their conferences unheralded or their locations overlooked. These schools have slowly been building a national reputation, and their rankings in the tournament have followed.

The ETFs that fit this bill are those that have burst on the scene in the past two years to unexpectedly reach and surpass $1 billion in assets in short order.

The most obvious example is the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca:SPLV), which literally came out of nowhere to attract what is now more than $4 billion in assets.

The WisdomTree Japan Hedged Equity Fund (NYSEArca:DXJ) is another ETF that has capitalized on a very popular trend to quickly amass over $5 billion in assets. Like Gonzaga, many are wondering if these assets can stick, or if this is a short-term bump that will ultimately flame out.

The Pimco Total Return ETF (NYSEArca:BOND) is another example that fits here, but its parallel might be a Miami as opposed to, say, a Gonzaga. After all, Pimco has been killing it in the mutual fund industry for years. Miami's recent success in basketball after being known for so long as a football juggernaut should not be a huge surprise, but like the startling early success of BOND, it is nonetheless impressive.

All of these funds might end up as the biggest asset gatherers this year, but nobody is really banking on it.

The Cinderella Stories

These are the funds that have little to no shot of winning the inflow battle this year, and might not make the dance next year.

In other words, these are the No. 15 or No. 16 seeds like Liberty or Iona, who are happy to just be a part of the fun. These are funds with little to no assets that may be closed this time next year. They are typically very narrow strategies that, while interesting, have yet to catch on with investors.

The SPDR S&P Small Cap Emerging Asia Pacific ETF (NYSEArca:GMFS) is a perfect example of a fund that might not be around a year from now, even if the fund's sponsor-State Street Global Advisors-rarely, if ever, closes funds.

Other examples in the Cinderella category are the EGShares Telecom GEMS ETF (NYSEArca:TGEM) and the EGShares Consumer Services GEMS ETF (NYSEArca:VGEM), which target emerging markets sectors.

The likelihood of these funds topping the inflows chart is greater than zero, but not by much. Anyone betting on these funds or these teams to win the tournament would do well to just light their money on fire, or buy the iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca:VXX).

Prediction

Of course, no bracket-style analysis would be complete without a prediction. For 2013, there will be only one winner, and it is perhaps the easiest prediction I have ever had to make.

The 2013 winner will be index investing, in all shapes and sizes. Come on, you didn't think I would go out on any sort of a limb did you?

At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Baiocchi at pbaiocchi@indexuniverse.com .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: EEM , GLD , IWF , JNK , VXX

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