Trend: The great variety of ETFs available today provide investors with vehicles to adapt quickly to most market conditions.
Bill Donoghue at MarketWatch describes why EFTs are taking market share from mutual funds.
The traditional mutual fund industry is cooking its own goose. Despite three of the past seven years being down years for stocks, fund families nearly universally refuse to revise their prospectuses to sell short, use leverage or go to cash. With the Dow Jones Industrial Average losing money in the first quarter and the threat of rising interest-rates, wise investors are becoming concerned even as the broad market has recovered.
ETFs can address a downturn directly. Accordingly, investors may "vote with their feet" and leave traditional funds. In that event, Rydex and ProShares could "win the election" and hold onto significant assets when the market turns.
Why are so many inverse ETFs and leveraged funds being offered now? Savvy investors smell a bear market around the corner and want to be ready.
At the end of 2006, there were exactly zero "negative beta," "short," or "inverse" and/or leveraged ETFs. Soon there will be 174 such ETFs from ProShares and Rydex alone. Rydex has 96 inverse of leveraged broad index or sector ETFs in registration and ProShares has 78 such funds filed with the SEC, several of which have already been released.
Rydex and ProFunds are most often used in asset allocation, sector rotation, and portable alpha and long/short strategies among others.
In addition, ETF investors have also been given a clear window to non-U.S. stocks. Foreign equities have widely outperformed domestic stocks over the past four years; 29 of the 50 top performing ETFs invest overseas. The wisest advisers took notice.
Traditional ETF families like State Street and Barclays are also paying attention. Recently, State Street launched six new attractive emerging market ETFs tied to Standard & Poor's indexes: diversified emerging markets; emerging Latin America; emerging Asia Pacific; China; emerging Europe, and emerging Middle East and Africa. The latter two add new niches to ETF-land: emerging Europe brings Poland into the mix and Emerging Middle East and Africa gives access to Turkey.
Barclays, meanwhile, already has 39 single-country ETFs and more are expected later this year as index partners MSCI and Russell refine their foreign stock index offerings.
Expect first to see country or regional ETFs followed by small-cap, midcap, and large-cap offerings by country and region, and even more finely tuned growth- and value-stock portfolios.
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