ETFs are big business in the US, and the industry is growing fast here in Europe too. Morningstar Associate Director of European ETF Analysis Bradley Kay here takes a look back at 2009 and what developments the US market saw over the past 12 months. For what we expect to see over the next 12 months, watch our recent video of Director of ETF analysis Scott Burns.
One of the things I love most about the ETF universe is its incredible coverage of global capital markets and the cornucopia of index products that seem to fill nearly every niche. This variety not only provides a tool for nearly every investment thesis but also allows us to take the pulse of nearly every market through the performance and asset flows of ETFs. In the crazy year of 2009, that pulse had plenty of palpitations and even a few arrests. We wanted to take this chance to highlight some of the oddball statistics and interesting patterns that showed up in a year for the record books.
Let's start this review out with the highest-returning non-leveraged ETF of 2009: Market Vectors Coal ETF, with a whopping 145% return for the year. Didn't see that one coming? It's OK, neither did anyone else. The fund had only $168 million in assets at the end of December 2008 and even experienced small net outflows through the first four months of 2009. Raw industrial materials were the great returners this year after 2008's incredible beating, with some of the other top returns coming from Market Vectors Steel ETF and iPath DJ-UBS Lead Sub-Index ETN. Even among contrarians searching for bargains at the beginning of the year, few were willing to place bets on these extraordinarily risky concentrated funds for fear that we had not yet seen bottom.
Instead, the contrarian money stayed in broader emerging-markets funds and was also very richly rewarded for it. Market Vectors Russia ETF started the year with more than $400 million in assets and ended it with $1.4 billion, after healthy inflows and an even healthier 139% rebound from last year's lows. The fund that produced the most wealth for shareholders, hands-down, was iShares MSCI Emerging Markets Index. This fund combined its massive $19.2 billion in December 2008 assets and $4.4 billion in inflows through 2009 with a year-long market return of 69% to generate more than $15.5 billion in wealth for shareholders (where I calculate the wealth generated as the difference between the 2009 year-end assets and the 2008 year-end assets, minus the net cash inflows to the fund through 2009).
iShares MSCI Emerging Markets Index might not hold on to this crown the next time an emerging-markets rally comes around, because Vanguard Emerging Markets Stock ETF looks like the new fund of choice with its 2009 inflows of $9.0 billion, as opposed to $4.4 billion for EEM. We're happy to see the tides shifting toward this fund because it offers the same index exposure at almost one third the price (0.27% annual expense ratio versus 0.72% for iShares offering). Until iShares cuts its fees to reflect the economies of scale from $40 billion in assets sitting in its Emerging Markets Index fund, we expect the money will keep flowing to the Vanguard fund.
This Vanguard fund did not experience the biggest inflows of 2009, however. That crown went to SPDR Gold Shares, which took in $11.1 billion as investors tried to hedge out the risk of inflation from monetary easing around the world. This fear of potential inflation could also be seen in the $8.4 billion of inflows to iShares Barclays TIPS Bond and the combined $6.3 billion that moved into the short end of the Treasuries curve via iShares Barclays 1-3 Year Credit Bond and Vanguard Short-Term Bond.
ETFs went from $540 billion in assets at the beginning of the year to $793 billion by December 31, but this year was not good for every provider. Several individual funds bucked this strong growth trend. The venerable S&P 500 tracker SPDRs had an incredible $21.0 billion in outflows over the course of 2009 (compared with a December 31, 2008, asset base of $93.0 billion), as investors seemed more than willing to take their gains from US stocks after March and run. The same story in miniature affected iShares Russell 1000 Growth, which gained 37% over the year but lost $2.3 billion to outflows, finishing up the year at $11.4 billion in assets.
At least those ETFs still showed strong gains for the year, making investors happy. A few large ETFs tanked this year and lost considerable amounts of money for investors. Given the strong rally nearly across the board, the fact that leveraged inverse funds top both the lists of biggest percentage losers and total money losers should be no surprise. However, these funds are typically used by institutional investors and other sophisticated traders who probably had hedging positions offsetting these losses or even producing net gains. The funds that really hit investors' pocketbooks were those that investors probably held on their own. In that category, the second-biggest wealth-destroyer for 2009 was iShares Barclays 20+ Year Treasury Bond, which had almost nowhere to go but down after US long-term Treasury yields hit incredible lows in December 2008. Of course, this fund provided one of the only safe havens in 2008, so it's hardly toxic. It should just remind investors that duration risk is a major factor in fixed-income investments. Just because you have your money in bonds doesn't mean you are safe from hefty losses.
The fall of long-dated US bonds caused a loss of less than $450 million of ETF investors' money--peanuts compared with the approximately $1.5 billion in wealth thrown into the black hole of contango known as United States Natural Gas. This fund had a good story, as new shale gas production came online in the US in 2008 while falling energy consumption and a mild winter combined to push gas prices down to incredible lows. However, the trade was far too crowded, so the futures prices kept staying higher than the spot and this fund was forced to buy high and sell low each month. Even as spot prices on natural gas ended up even for the year, this fund lost 57% due to the effects of rolling the futures contracts each month.
Disclosure: Morningstar licenses its indices to certain ETF and ETN providers, including Barclays Global Investors (BGI), Claymore Securities, First Trust, and ELEMENTS, for use in exchange-traded funds and notes. These ETFs and ETNs are not sponsored, issued, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in ETFs or ETNs that are based on Morningstar indices.
