The top 10 new ETFs
south of the border brought in $4.8 billion in 2014. Here are three key takeaways from this year’s rookie squad.
Takeaway # 1
There were very few original ideas in 2014’s rookie crop.
According to CNBC, “Five of the top 10 [new] exchange-traded products in 2014 (including exchange-traded notes, or ETNs) were based on existing active manager strategies already popular with financial advisors or high-net worth investors that were recreated in an ETF wrapper…”
Case in point is the Deep Value ETF from New York-based Tiedemann Wealth Management. It brought in more than $200 million in its 2014 debut, most of which was rolled over from a limited partnership
run by TWM into the ETF. Without the existing clients and their assets, Deep Value’s debut would have been far less noteworthy.
Takeaway # 2
Investors really like momentum plays.
The only ETF do rake in more than a billion dollars in 2014 was First Trust’s Dorsey Wright Focus 5 ETF
, which generated $1.2 billion in first-year revenue. A fund-of-funds ranking all of First Trust’s sector and industry funds, the five with the greatest price momentum relative to other ETFs in their universe receive an equal weighting.
The relative strength analysis is done weekly. Whenever one of the ETFs falls out of favor and price momentum is lost that ETF is replaced with all five receiving an equal weight of 20%. The ETF’s sector holdings currently include biotechnology, health care, staples, internet and consumer discretionary.
Underperforming the S&P 500 by almost 200 basis points since its inception in March, the ETF’s MER of 0.95% is quite high relative to its American peers. First Trust introduced its sector funds in Canada
in late October. It’s possible they’ll bring out a Canadian version of this fund-of-funds some time in 2015.
Takeaway # 3
Hedging against currency volatility is on people’s minds.
iShares had three ETFs amongst the top 10 in 2014. Two were offshoots of its “Core” series of funds while a third was a currency-hedged version of its MSCI Japan ETF. The new fund brought in almost $300 million in first year in existence.
While good, it’s got a long way to go if it wants to catch up with WisdomTree
, whose Japan Hedged Equity Fund and Europe Hedged Equity Fund have almost $17 billion in assets under management between the two of them, neither of which is even a decade old.
While an argument can be made for investing in currency-hedged ETFs, the Canada Pension Plan isn’t nearly as convinced. In its 2013 annual report it stated, “We see no compelling reason to hedge equity-related currency exposures… We accept that in years of large currency moves, total Fund performance may be materially affected — in either direction — relative to other funds that have hedged currency exposure.”
Whether good or bad it appears currency-hedged ETFs are only going to become more popular.