The 7 Most Anticipated New ETF Developments of 2010

Last year saw the continuation of the ETF industry’s impressive rise, with more than 100 new products hitting the market and a handful of new issuers entering into the arena. While many of the new exchange-traded products are “plain vanilla” funds that will compete directly with existing products, we also saw a number of truly innovative products that expanded the universe of asset classes available to all classes of investors. The last year has seen the introduction of sector-specific emerging markets and China ETFs, active bond funds from PIMCO, state-specific ETFs, and ETNs linked to the CBOE Volatility Index (better known as the VIX), just to name a few. And for all the talk about saturation in the ETF industry, most of the funds launched last year performed pretty well (see the top ten most successful new ETFs from 2009).

At the recent Inside ETFs Conference in Florida, nearly every issuer expressed excitement regarding their new product pipeline for 2010. The number of new product launches should exceed the 2009 total, and could push 200 if all goes as planned. While there’s a lot of filings floating around out there, some of the ETFs that could hit the market in 2010 are more exciting than others. There’s no guarantee that any of the funds profiled below will launch in 2010. In fact it’s not even certain that they’ll ever hit the market. But given the interesting investment theses and unique exposure offered, investors are no doubt hoping to see these soon.

7. Passive ETFs from Goldman, Active ETFs From T. Rowe

Last year saw a handful of well known active managers finally make an entrance into the ETF industry. Some played catch-up through major acquisitions (BlackRock, (BLK) Guggenheim), while others started from scratch (Schwab, PIMCO). While it’s tough to predict which companies could try to make a splash through an acquisition in 2010, it seems that Goldman Sachs (GS) and T. Rowe Price will become the latest financial behemoths to wade into the ETF waters.

Goldman’s 40-APP filing with the SEC was surprising not for what it included–requests for exemptive relief and details of an ETF offering “an extensive representation of the Brazilian, Indian, Chinese and Korean markets”–but for the lack of any details on actively-managed ETFs.

Meanwhile, T. Rowe Price filed for approval on a line of actively-managed ETFs, noting that its first fund would invest primarily in domestic fixed income securities but that future products could target domestic and international equities as well as global fixed income securities. The coming months should bring more details on what these two have planned, and investors will be curious to see what products they ultimately roll out.

6. Sector Specific Small Cap Funds From PowerShares

PowerShares, the fourth largest ETF issuer by assets under management, is perhaps best known for its enhanced indexing products, and promotes itself as a leader of the “intelligent ETF revolution.” So it may have come as a bit of a surprise that the Chicagoland firm is planning a line of sector-specific small cap ETFs. The ten funds would each track a subset of the S&P SmallCap 600 Index, a benchmark that measures the performance of companies with a market capitalization of less than about $1.2 billion.

There are numerous small cap ETFs already available, and sector-specific ETFs are numerous as well. But surprisingly, none of these funds overlap, meaning that PowerShares could once again be pioneering a new corner of the ETF market. In addition to offering unique risk and return profiles relative to existing sector specific products, the proposed funds would offer exposure to certain industries without heavy tilts towards a handful of mega-cap stocks. See the SEC filing for the small cap sector funds here.

5. Active Currency ETFs From WisdomTree

WisdomTree may be best known for its fundamentals weighted ETFs, but the company has a handful of hit currency funds as well. In addition to a line of currency specific products, the Dreyfus Emerging Currency Fund (CEW) has been one of the most successful funds launched in the last year. CEW is designed to deliver returns reflective of both money market rates in emerging economies as well as movements in those currencies relative to the dollar.

WisdomTree is expected to expand its line of currency products in 2010 with two more actively managed products. One fund would be similar to CEW, but focus on money market investments in commodity-producing countries such as Australia, Brazil, Indonesia, Russia, and South Africa. Also in the works is a fund designed to offer exposure to appreciation of the dollar relative to a basket of up to 15 currencies. The Rising Dollar Fund would invest in short-term government bonds along with forward currency contracts, futures contracts, and swaps.

See the prospectus for these new products here.

4. More Active Bond Funds From PIMCO

Perhaps the most anticipated development in the ETF industry in 2009 was the entrance of bond fund giant PIMCO, which launched its first ETF in June. By the end of the year TUZ had attracted almost $150 million in assets and PIMCO had introduced eight more ETFs, including two active funds, the cleverly-named MINT and MUNI. While actively-managed equity ETFs have been slow to gain traction, MINT and MUNI got off to a strong start, due in no small part to the 0.35% expense ratios.

PIMCO’s active bond ETF product line could expand significantly this year, with the Government Limited Maturity Strategy (GOVY) and Prime Limited Maturity Strategy (PPRM) ETFs both awaiting introduction. Also in the pipeline is the PIMCO Short Term Municipal Bond Strategy (SMMU), which is slated to be managed by EVP John Cummings. PIMCO has a long and impressive track record in bond fund management, and the Newport Beach, California-based firm seems poised to expand its market share in the ETF arena this year.

There is still no sign of the item at the top of many ETF investors’ wish lists: an exchange-traded version of PIMCO’s ultra-popular (and successful) Total Return Fund. Maybe in 2011.

3. Active Commodity Fund From U.S. Commodity Funds

Commodities investing has become tremendously popular in recent years, thanks in no small part to the rise of the ETF industry. According to the year end data from the NSX, long commodity funds saw cash inflows of $42 billion in 2009, more than total assets as the beginning of the year.

A significant portion of commodity ETF assets are held in funds offered by U.S. Commodity Funds, the firm behind the ultra-popular UNG and USO. Now USCF is teaming with SummerHaven Index Management on an actively-managed commodities index that has positions in energy, precious and industrial metals, and agricultural commodities. Each month, the index will select 14 commodities from a universe of 27 resources based on fundamental indicators. The minds behind the proposed fund are responsible for some of the more compelling studies justifying the inclusion of commodities as an asset class and interesting research on opportunities for improving on commodity returns by focusing only on futures markets in backwardation.

With the exception of the ELEMENTS S&P CTI ETN (LSC), most commodity products are completely passive, exposing them to the potential ravages of contango. It will be interesting to see if USCF and SummerHaven can deliver a better mousetrap. See the fund’s prospectus here and a more thorough write-up on some of the potential advantages here.

2. Mid Cap China, Brazil, and India ETFs From Emerging Global Advisors

With funds focusing on markets from Africa to Vietnam, U.S. investors can now access equities from every corner of the world through ETFs. But the vast majority of international funds are dominated by mega-cap stocks that often generate a significant portion of revenue and earnings from markets outside their home country. While these securities are no doubt impacted by local economic conditions to some extent, they will generally maintain a strong correlation with global equity markets. The iShares MSCI Spain Index Fund (EWP) is a good example. More than 40% of fund assets are allocated to Telefonica (TEF) and Banco Santander (STD), two companies that have extensive Brazilian operations. The components of EWP may be traded on Spanish exchanges, but the fund isn’t necessarily a pure play on the Spanish economy.

Options for international equity exposure are expanding rapidly. Van Eck offers a small-cap Brazil ETF (BRF) and has a small cap Latin America fund in the works as well. Small cap exposure to Japan, China, the EAFE region, and diversified developed markets are now available.

Emerging Global Advisors, the issuer behind the first sector-specific emerging markets ETFs, has filed for approval on what would be the first U.S.-listed funds focusing on mid cap equities in Brazil, China, and India. In order to be eligible for inclusion in the India fund, companies must have a market cap less than the smallest component of the S&P CNX Nifty Index. The China mid cap fund will include companies between $500 million and $5 billion, while range for the Brazil mid cap ETF would be $400 million to $4 billion. Targeted international funds have been a big hit so far, and there’s no reason to believe the reaction to these mid cap ETFs would be any different.

See the prospectus for the funds here.

1. Leveraged Monthly ETFs From Direxion

Since their introduction less than five years ago, leveraged ETFs have become tremendously popular among active, sophisticated investors looking to accomplish a wide variety of objectives, from establishing a hedge to generating absolute return. But these products have also generated a fair amount of controversy, primarily related to the daily investment objectives they maintain. In order to offer daily exposure, leveraged ETFs must rebalance following every trading session. The effects of compounding daily leverage can be complex, and can lead to losses when held for multiple periods (although compounding can also work for investors in many environments).

Investors are clamoring for ETFs that reset exposure on a monthly basis, allowing them to achieve amplified results on an underlying index over a longer period of time without the use of a rebalancing plan. Direxion filed for a batch of 40 ETFs that would rebalance on a monthly basis in 2009, and has already launched a line of leveraged mutual funds with a monthly focus. For those looking to triple down on directional play but without the time or resources to monitor investments on a daily basis, leveraged ETFs will no doubt be tremendously popular.

See the filing for these funds, which include bull and bear takes on domestic and international equities, sector benchmarks, and Treasuries, here.

Author's Disclosure: No positions at time of writing.