If you don’t already know what a big fan of exchange-traded funds (ETFs) I am, you’ve either got your head in the sand or you are a new Alert reader. For the benefit of those ostrich types out there, as well as the new members of my online community, I am going to repeat what I’ve so often said about ETFs.
Quite simply, I have never been more excited about a financial instrument and its possibilities than I am about ETFs. The low cost, array of choice, ease of trade and objective management you get with ETFs is by far the greatest development in investing we’ve seen during the past decade.
One of the commitments I’ve made to you, the Alert reader, in 2007 is to bring you all of the news out there on the ETF front. I also will help you to understand, to interpret and to profit from all the latest developments in ETF land.
As we begin 2007, I want to point out five ETF trends sure to have a significant influence on the market throughout the year.
ETFs Take a Trip Around the World
International investments continue to grab investor dollars. Recent data show that $124 billion of new money has flowed in equity mutual funds this year and much of that money has gone to international ETFs.
I expect international ETF offerings to continue their recent expansion and to continue to outperform domestic ETFs. I also see a huge increase in the number of region-specific ETFs, as well as a continued influx of investment capital into these regions. The regions most likely to get greater ETF exposure in 2007 are China, Japan, Taiwan and Eastern Europe.
A New Kind of Active Management
Last year, we saw the advent of the actively managed ETF — a mutual fund hybrid of sorts that is designed to get investors back to the managed investment model. Of course, active management entails higher costs and additional fees to you that will boost the revenues received by the ETF companies.
One of the beautiful characteristics of ETFs is their objective management. As a result, the performance of ETFs usually is tied to a specific index. When that index is performing well, the ETF will do well, too. When the index is out of favor, then the ETF that tracks it will be a laggard, as well. This simple design isn’t likely to be usurped in popularity by actively managed ETFs, but I think you are going to see more of these new fangled investment vehicles in 2007.
ETFs Make it into Your 401(k)
The investing public already is proclaiming its allegiance to ETFs. That fact is not ignored by corporate America and its millions of employees who want ETF offerings in their 401(k) plans. The expenses associated with 401(k) plans are quite high but plan administrators now are seeing a way to lessen these fees by using ETFs. This cost-saving potential is why 2007 could be the year of widespread ETF adoption in many large 401(k) plans. And, as these plans have success, more ETFs in more retirement plans likely will be a trend for years to come.
It’s All About the Bear
The bull market, particularly during the last half of 2006, has taken many a pundit by surprise. But anyone with a sense of history knows that this latest winning streak can’t continue forever. I’ve been arguing that a correction is very likely at hand. And, that outlook means a sustained period of selling in stocks. Fortunately for us, this looming correction doesn’t have to mean an inactive portfolio. Thanks to bear market ETFs designed to go up when the market goes down, you can make money even if stocks are trending lower. I think a lot more of us, including myself, will be using bear market ETFs in 2007.
Fidelity Joins in on the Fun
Even one of Wall Street’s biggest players is being pressured to get into the ETF game. Fidelity Investments, one of the investment world’s most lauded firms, is likely to enter into the ETF fray real soon. The company actually tried to do this back in 2003 but it pulled the plug on the project for fear of cutting into its managed fund business. But with more and more investors wanting ETFs, you can bet that it won’t be long before the investment giant gives its clients what they want — and what the customers want is ETFs.
For more information about the latest news in the ETF world, you can find no better place than ETFTrends.com. This site is run by my long-time friend, Tom Lydon. Tom is attuned to the ETF business. And, like me, he’s made it a personal mission to keep readers up to snuff on all of the latest, breaking ETF news. If you’re interested in ETFs, you’ve got to check out ETFTrends.com.