The Individual Investor’s Guide to Exchange-Traded Funds 2012
The exchange-traded fund (ETF) industry continues to expand, though the rate of growth has slowed. Net assets controlled by ETFs totaled a record $1.163 trillion as of June 30, 2012. Though a large number, it represents just a 7.8% increase from 12 months prior.
As you can see in Table 1, the percentage increase was the smallest since the 12-month period ended June 30, 2009. In terms of absolute dollar growth, the industry experienced the second-smallest mid-year 12-month increase since June 30, 2005.
In this article
- Impacts on Growth
- Actively Managed ETFs
- A New Performance Statistic
- A Warning About ETNs
- How to Use This Guide
- Which Funds Were Included
- Ultra and Contra ETFs
- A Key to Terms and Statistics
- Exchange-Traded Fund Categories
- ETF & ETN Contact Information
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Impacts on Growth
Does this mean the industry is becoming mature? We think it is too early to tell. Volatile market conditions have impacted growth and certainly have played a role in keeping some investors skittish about allocating more money to equity investments. This sentiment would have limited growth in total assets. Fund families are continuing to introduce new exchange-traded products, a sign of continued growth. New to this year’s guide are more than 240 funds that were started after July 1, 2011. (Most of these new funds can be found in the online version of the guide, at AAII.com, as they were too small for inclusion in the print version.)
We also looked at the 25 largest exchange-traded funds to see if there was any consolidation at the top, which would be a sign of a maturing industry. The two largest funds, SPDR S&P 500 (SPY) and SPDR Gold Shares (GLD), did get larger with total assets increasing by 12.6% and 12.4%, respectively. Below those two, the data gets more mixed. Vanguard MSCI Emerging Markets ETF (VWO) grew by just 3.0%. iShares MSCI EAFE Index (EFA) and iShares MSCI Emerging Markets Index (EEM) saw their total assets decrease by 13.4% and 12.0% respectively. Some large funds did grow significantly, including iShares iBoxx $ Investment Grade Corporate Bond (LQD) and Vanguard Total Bond Market ETF (BND). The ninth and 11th largest funds saw their assets increase 64.7% and 69.8% over the past 12 months, respectively.
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Discussion
My portfolio includes a grouping of etf's under the title ETF MARKET OPPORTUNITIES sym: ETFOX. I subscribe to Barron's Magazine and I cannot locate this etf anywhere in the magazine. Seems to be a strange hybrid. Are there other etf's like this? Morningstar shows it as a 5-STAR fund. However, contrary to other etf's it has a 2.06 expense ratio which is very high and the return is not particularly good for a large growth stock investment. May I have your thoughts please? Thank you. Robert Burtness at rburt6@charter.net. This article was very informative and I plan to print it out for further study.
posted 7 months ago by Robert Burtness from Minnesota
Hi Robert,
ETFOX is not an exchange-traded fund. Rather, it is a mutual fund that invests in ETFs. You are paying a high expense ratio in the hopes that the mutual fund manager is able to correctly put together the correct mix of ETFs over the long-term.
Keep in mind that the fund has to beat its benchmark by 2% each year just to get you a return similar what you would be able to get by simply investing in a diversified ETF, such as the SPDR S&P 500 (SPY) or the Dow Jones U.S. Index (IYY).
-Charles
posted 7 months ago by Charles Rotblut from Illinois
Hi Robert,
ETFOX is not an exchange-traded fund. Rather, it is a mutual fund that invests in ETFs. You are paying a high expense ratio in the hopes that the mutual fund manager is able to correctly put together the correct mix of ETFs over the long-term.
Keep in mind that the fund has to beat its benchmark by 2% each year just to get you a return similar what you would be able to get by simply investing in a diversified ETF, such as the SPDR S&P 500 (SPY) or the Dow Jones U.S. Index (IYY).
-Charles
posted 7 months ago by Charles Rotblut from Illinois
Great Article!
Many of us are retired or close to it and it would be great if you can list those ETF's that provide Monthly Dividends.
I have found about 30 so far and appreciate the monthly checks from those I have purchased.
Also, How are the expenses for ETF's collected? I BUY and SELL at the BID & ASK as in purchasing equities. How do I end up paying the fee?
posted 7 months ago by Joe Petti from Connecticut
The ETF data base is AWESOME and very helpful, however, in constructing my portfolio, I need to break it down by Category, Sub-Category and industry. The Morningstar listing doesn't provide a granular breakdown with definitions. I checked the Morningstar site but, if they have such a breakdown, it's not apparent. Can you help?
Thanks...Anthony Howd
posted 7 months ago by Anthony Howd from New Hampshire
Thanks Anthony.
We do not have the level of detail you are asking for. It's difficult to break funds down into industry groups, because industry classifications vary and many funds cover sectors instead of individual industries.
-Charles
posted 7 months ago by Charles Rotblut from Illinois
I recently discovered that there are ETFs that invest in Master Limited Partnerships. These seem to ahve the advantages of high income distributions without the tax paperwork and complexities of MLPs.
Can you give me the scoop? Are these as good a deal as I have been led to believe, or am I missing something?
posted 7 months ago by Robert Borger from Virginia
Robert,
I spoke with the manager of the Alerian MLP fund (AMLP) last year. You can read a transcript of the interview in the Nov 2011 Journal:
http://www.aaii.com/journal/article/master-limited-partnerships-income-from-a-unique-structure-and-industry
-Charles
posted 7 months ago by Charles Rotblut from Illinois
Charles,
Thank you, excellent interview.
Question: I am restricted to $1,000 or less to invest in an MLP in an IRA; does the same restriction apply to an MLP ETF?
Also, the 1 and 37 rule seems to indicate that my returns are going to be reduced by a big expense fee; how does this affect real returns?
posted 7 months ago by Robert Borger from Virginia
Robert,
You are not restricted to investing $1,000. Rather the unrelated business taxable income cannot exceed $1,000 per year. The investors relations department with a MLP should be able to give you some idea what past year's UBTI ran.
Expenses reduce your returns on a dollar for dollar basis at the time they are incurred. Because you will never see the money lost to expenses again, they also reduce your future returns do to the impact of compounding; you have less money to grow.
That said, you need to consider the perceived value of the services you are receiving for those expenses. For some people, avoiding the tax issues associated with MLPs and getting exposure to a large number of MLPs is worth the expense ratio charged by AMLP.
-Charles
posted 6 months ago by Charles Rotblut from Illinois
How safe are ETFs? A stock broker advised me that, because of their structure, ETFs can become illiquid during periods of high market volatility. Is that true?
What are the risks of ETFs, and how do they compare with the risks of mutual funds?
posted 4 months ago by John Mahlum from Washington
John,
ETFs trade like stocks. Some are very actively traded and always have buyers and sellers. Some have comparatively low volume and can be harder to buy and sell immediately. If you stick with the larger ETFs, typically, those that track broad and well known indexes, such as the S&P 500, you should be fine. It is the ETFs that target small, very specific indexes that tend to have the lower volume and can be harder to quickly buy and sell.
Mutual funds are bought and sold from a mutual fund company. The advantage is that you can sell them at the end of each trading day. You don't know what the price is until the end of the day, however, whereas ETFs have updated quotes throughout the trading day.
Both ETFs and mutual funds can be good investments. Does your broker offer low cost, no load mutual funds or does he only suggest ones that come with a load (a fee to buy or sell the fund)? If the latter, it may be to his advantage to steer you away from ETFs, because he does not want to lose commissions.
-Charles
posted 4 months ago by Charles Rotblut from Illinois
Is there any study done S&P 500 vs ETF to find performance that you can refer me to or give information? Also your mention it is difficult to sell/buy small cap ETFs, does this pose a risk for retired investor who might need money quickly?
A response will be appreciated.
posted about 1 month ago by Vaidy Bala from
