With March Madness in full swing, we thought it would be
interesting to see just how the world of
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?
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
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
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
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.
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
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
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
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).
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
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