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ETF Trends For 2016: Part 1, Currency-Hedged Products

2015: A Quick Look Back Constant talk of interest rate hikes, the China market correction in August and the start of ‘chip’ credit cards in the U.S. – these are the things I believe will stand out in my mind if asked 10 years from now what happened in the world of finance in 2015. However, for Exchange Traded Funds (ETFs) 2015 was all about the continuing growth of Smart Beta strategies, the potential for Non-Transparent Exchange Traded Mutual Funds and new niche funds (like the iShares Exponential Technologies ETF (NYSEARCA: XT ) or the Restaurant ETF (NASDAQ: BITE )). According to ETF.com : As of Dec. 3, 2015, 270 ETFs had launched on U.S. exchanges. That is far beyond the roughly 200 funds that rolled out in 2014, and sets 2015 up to be a record-breaking year. You have to go back nearly a decade to find a year that achieved a similar number of launches. Click to enlarge As shown by the above image from the ICI 2015 Investment Company Fact Book , ETFs continue to grow in assets under management (AUM) and the number of fund offerings for investors. However, ETFs have yet to overtake mutual funds. But at current growth rates, ETFs will see parity soon enough. According to an article from Camilla de Villiers of Thomson Reuters: ETF assets today are expanding by 24% per annum – triple the rate of traditional mutual funds. Notwithstanding their popularity, ETFs have fallen well short of displacing the $16 trillion mutual fund industry. But over the long term, on current rates of growth, mutual funds and ETFs will reach parity at $50 trillion each by 2030. Earlier this year, Schwab commissioned an online study to gauge U.S. investor interest in ETFs (pdf download linked here ). The full report is a great read and full of useful data, but one key point especially stood out. As ETF interest continues to grow, we also see that the most avid users are the tech savvy first adaptors, millennials. Click to enlarge As of publication, we can see (using ETF.com’s Fund Flows tool ) investors in 2015 were not just interested in plain vanilla market cap-weighted funds, but their interest in specialized tools to conquer the market has continued to grow. However, old standbys like the Vanguard S&P 500 ETF (NYSEARCA: VOO ), the iShares Core U.S. Aggregate Bond ETF (NYSEARCA: AGG ) and the Vanguard Total Stock Market (NYSEARCA: VTI ) do continue to see investor appreciation. But the continuing impressive growth of ETF assets is to some extent old news in the investing world. What we’d like to focus on in the rest of this brief report are 3 key industry trends and their implications for the continued success of ETFs in the future. In this first part, we are going to cover currency-hedged products, while parts 2 and 3 will be on robo investors and expense ratios respectively. Currency-Hedged Products & Iterations On A Theme WisdomTree (NASDAQ: WETF ) launched its first currency-hedged fund in 2006, the Japan Hedged Equity Fund (NYSEARCA: DXJ ), and it took three-and-a-half years for them to launch a second, the Europe Hedged Equity Fund (NYSEARCA: HEDJ ). Clearly the idea didn’t catch fire right away, but it is growing rapidly now. There are now over 50 ETFs with a mandate to not only invest in equities from a region, but also neutralize exposure to fluctuations between that region’s currency and another (often the U.S. dollar). HEDJ and the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEARCA: DBEF ) even led fund creations for 2015, with $15.77 and $12.67 billion respectively, as concerns around a weakening euro hit investors. This slight change in mandate from your average international-focused index fund can have a dramatic effect on returns. For example, see DXJ and HEDJ’s 5-year returns against two popular non-hedged funds tracking Japan and Europe as well, the iShares MSCI Japan ETF (NYSEARCA: EWJ ) and the Vanguard FTSE Europe ETF (NYSEARCA: VGK ). Click to enlarge To be fair, a currency hedge can be a negative thing for investors as well. When the dollar starts to fall against a foreign currency, currency-hedged investors lose out on the gain from this relationship. As stated by Chris Dieterich of Barron’s : For now, WisdomTree’s stock looks likely to behave as a leveraged play on the dollar. The higher the greenback goes, the more traders will clamor for currency-hedged ETFs. When wondering where the push for these funds came from finally and where they will go from here, we turn to a quote from Greg McFarlane of Investopedia : The upsurge in currency-hedged ETFs is a recent phenomenon spurred by an unmistakable cause – national banking authorities obsessed with inexpensive money. Players are entering the market at an alarming rate. With more such ETFs available to the individual investor, and firms thus forced to compete on price (which is to say, expense ratios), there’s never been a better time to not only expose yourself to international markets, but reduce price movement risks while doing so. Deutsche Bank (NYSE: DB ), iShares and WisdomTree lead the fund creation march now, but IndexIQ is the first to look outside the standard currency-hedged product box in the quest for differentiation and further investor assets. Its recently launched lineup of 50% currency-hedged ETFs each hedge approximately 50% of its foreign currency exposure to mitigate the effect of currency fluctuation on USD index returns rather than the traditional 100% hedge. These kinds of iterations on a theme will only offer investors further options when considering a currency-hedged strategy. Stay tuned for part 2 next week, which will focus on the rise of robo investors and how this industry will affect ETF investors and continue to grow in 2016.

Top 5 Mutual Fund Sectors In 2015

While most of the major mutual fund sectors struggled to finish 2015 in the green amid concerns stemming from China-led global growth worries and the slump in oil prices, some succeeded in coming out with flying colors. The strong rebound in the fourth quarter, after a declining trend till the third quarter, primarily boosted these funds. The Dow and the S&P 500 posted their worst yearly performances since 2008, and cash flows were also on the discouraging side. Mutual funds witnessed huge cash outflows in 2015, which hit record highs multiple times. While US-focused mutual fund categories failed to register double-digit gains in 2015, only the Japan Stock category registered growth. Mutual funds started the year 2015 on a positive note, with 87% of funds finishing in the green in the first quarter. But their performance deteriorated in the second quarter, when only 41% of funds succeeded in registering gains. The performance in the third quarter was the worst in four years. While only 17% of mutual funds finished in the green in the quarter, the Bear Market funds category, which bet against the market uptrend, emerged as the top gainer in both August and September, adding 9.1% and 4.2%, respectively. However, mutual funds recovered significantly in the fourth quarter, which also included October – the best month in four years. Meanwhile, foreign mutual funds, including those focused on acquiring Japanese stocks, outperformed domestic mutual funds last year. In such a scenario, we present the top 10 mutual fund categories in 2015: Mutual Fund Category 2015 Return (%) Japan Stock 11.97 Health 8.05 Foreign Small/Mid Growth 7.04 Technology 5.21 Consumer Defensive 4.15 High Yield Muni 4.09 Foreign Small/Mid Blend 3.79 Muni California Long 3.72 Large Growth 3.6 Preferred Stock 3.18 Source: Morningstar Major Concerns As mentioned earlier, mutual fund cash flows remained weak in 2015, mostly due to the overall negative tone of the U.S. markets. As a matter of fact, in the first half of 2015, fund inflows slumped 36% year over year to $143 billion. This drastic fall was largely due to the dismal second quarter, wherein inflows declined to $41 billion through June 17, comparing unfavorably with $102 billion of inflows in the first quarter. The markets were affected all-year round by several concerns, such as sluggish growth in major economies, including China and the eurozone, the slump in oil prices, a strong dollar and rate hike fears. Worries emanating from Grexit concerns, the plunge in biotech stocks following price gouging concerns and geopolitical tensions in regions like Yemen and Syria also dealt huge blows to the major benchmarks. Additionally, in the week that the Fed finally decided to hike rates, bond mutual funds witnessed massive outflows. According to Lipper, for the week ending December 16, $15.4 billion was pulled out of taxable bond funds. Also, high yield junk bond funds witnessed the largest outflow of $3.8 billion since August 2014 in the same week. An outflow of $5.1 billion from investment-grade bond funds was the biggest since Lipper started recording data in 1992. 5 Best-Performing Fund Categories in 2015 In this section, we have highlighted the five best-performing mutual fund categories of 2015 and also recommend one mutual fund from each category that has a Zacks Mutual Fund Rank #1 (Strong Buy) and other strong fundamentals. Japan Stock Japan opted for several economic stimulus measures last year, which proved to be more effective than the steps taken by China and the eurozone. The economy rebounded strongly in the third quarter to register a GDP growth rate of 1%, contrary to the second quarter’s contraction of 0.5%. Japan’s key index, Nikkei, hit an 18-year high in 2015. Hence, the Japan Stock category, which was also the best gainer in the first half of 2015, finished right at the top with nearly 12% gains last year. Fidelity Japan Smaller Companies Fund No Load (MUTF: FJSCX ), which invests most of its assets in securities of Japanese small-cap companies or other instruments that are economically connected with Japan, was one of the top performers of this category. The fund returned 12.6% last year. It also has a 3- and 5-year annualized return of 16.6% and 10.2%, respectively. Moreover, FJSCX’s expense ratio of 0.97% is lower than its category average of 1.43%. Healthcare The healthcare category, which is considered as a consistent performer, came in second in 2015. A massive sell-off in biotech stocks through August and September, and concerns regarding Hillary Clinton’s plan to prevent “price gouging” for specialty drugs had a negative impact on the category. However, a strong rebound in the fourth quarter helped the sector to finish the year on a positive note with a modest gain of 8.1% in 2015. Encouraging third-quarter earnings results, merger and acquisition activities, product approvals and encouraging pipeline updates were mainly behind the rebound. Vanguard Health Care Fund Investor (MUTF: VGHCX ) invests in healthcare companies, including pharmaceutical firms, medical supply companies and companies engaged in operations related to medical and biochemical. The fund returned 3.8% in 2015 and has an expense ratio of only 0.34%, compared to the category average of 1.37%. VGHCX also has a 3- and 5-year annualized return of 24.8% and 20.3%, respectively. Foreign Small/Mid Growth Although concerns regarding sluggish growth throughout the globe had a negative impact on markets in most of 2015, the Foreign Small/Mid Growth sector managed to register healthy gains. Investors found foreign countries attractive, as the central banks of major regions opted for economic stimulus measures. As a result, the sector occupied the third position with more than 7% yearly gain. AllianzGI International Small-Cap Fund A (MUTF: AOPAX ) primarily invests in securities of companies having market capitalization similar to those included in the MSCI World Small-Cap Index. The fund returned 9.8% last year. It also has a 3- and 5-year annualized return of 9.8% and 6.1%, respectively. AOPAX’s expense ratio of 1.45% is lower than its category average of 1.53%. Technology Though several concerns, including a stronger dollar and weak global growth, negatively impacted the technology sector, it was one of the few bright spots in 2015. Broad-based gains in the sector helped the tech-heavy Nasdaq to clearly outperform the other major benchmarks in 2015. Meanwhile, the sector was one of the best performers in the third-quarter earnings season. These factors boosted the category to increase 5.2% in 2015. T. Rowe Price Global Technology Fund No Load (MUTF: PRGTX ) invests the majority of its assets in companies expected to derive a large proportion of their revenues from the development and application of technology. It returned 10.4% in 2015 and has an expense ratio of 0.91%, which compares favorably to the category average of 1.45%. The fund also has a 3- and 5-year annualized return of 24.4% and 17.3%, respectively. Consumer Defensive This is one of the main categories that gained from the low oil price environment. Also, a steady increase in consumer expenditure played an important role in boosting the U.S. economy throughout 2015, helped the category to finish in the positive territory. Additionally, a strong job market, which includes healthy job gains and a declining unemployment rate, also boosted the category for most of the year. As such, Consumer Defensive returned nearly 4.2% in 2015 and finished in the top five. Fidelity Select Retailing Portfolio No Load (MUTF: FSRPX ) invests a large chunk of its assets in securities of firms involved in merchandising finished goods and services to consumers. The fund returned 17.8% last year. It also has a 3- and 5-year annualized return of 21.4% and 19.1%, respectively. FSRPX’s expense ratio of 0.81% is lower than its category average of 1.41%. Original Post

ETF Update: A Look Back At December And 8 Funds To Kick Off The New Year

Welcome back to the SA ETF Update. My goal is to keep Seeking Alpha readers up to date on the ETF universe and to gain some visibility, both for the ETF community, and for me as its editor (so users know who to approach with issues, article ideas, to become a contributor, etc.) Every weekend, or every other weekend (depending on the reader response and submission volumes), we will highlight fund launches and closures for the week, as well as any news items that could impact ETF investors. Recently, Zacks published a piece on the funds that launched in 2015 and gained in assets under management right away. They were the S PDR DoubleLine Total Return Tactical ETF (NYSEARCA: TOTL ), the SPDR S&P North American Natural Resources ETF (NYSEARCA: NANR ), the iShares Exponential Technologies ETF (NYSEARCA: XT ), the Goldman Sachs ActiveBeta Emerging Markets Equity ETF (NYSEARCA: GEM ) and the SPDR Russell 1000 Momentum Focus ETF (NYSEARCA: ONEO ). While all of these funds saw strong support from investors, none ended the year with positive returns. Overall, markets took a turn for the worse in end of Q3 and beginning of Q4 and had to spend the rest of the year climbing out of that hole (most sectors are still stuck). There were 23 launches in December and no closures for the month. December Total Launches Fund Name Ticker SPDR S&P 500 Fossil Fuel Free ETF SPYX MomentumShares U.S. Quantitative Momentum ETF QMOM SPDR Russell 1000 Momentum Focus ETF ONEO SPDR Russell 1000 Low Volatility Focus ETF ONEV SPDR Russell 1000 Yield Focus ETF ONEY Direxion Daily S&P Biotech Bear 1X Shares LABS Direxion Daily Natural Gas Related Bear 3X Shares GASX Daily Healthcare Bear 3x Shares SICK Tierra XP Latin America Real Estate ETF LARE Elkhorn FTSE RAFI U.S. Equity Income ETF ELKU iShares FactorSelect MSCI Emerging ETF EMGF Pacer Trendpilot European Index ETF PTEU Pacer Autopilot Hedged European Index ETF PAEU Guggenheim Dow Jones Industrial Average Dividend ETF DJD SPDR S&P North American Natural Resources ETF NANR JPMorgan Diversified Return Europe Equity ETF JPEU WisdomTree Dynamic Long/Short U.S. Equity Fund DYLS WisdomTree Dynamic Bearish U.S. Equity Fund DYB MomentumShares International Quantitative Momentum ETF IMOM Legg Mason Developed ex-US Diversified Core ETF DDBI Legg Mason Emerging Market Diversified Core ETF EDBI Legg Mason US Diversified Core ETF UDBI Legg Mason Low Volatility High Dividend ETF LVHD Only a couple of these funds ended December with positive returns; it was a hard month to jump into the market. Hopefully, our rocky start to 2016 doesn’t set any trends in motion, otherwise these new launches from the last two weeks could have a hard time finding traction. There were 12 funds launched in the last 2 weeks, including the last 4 funds on the December launch list above. With tons to cover, let’s jump right in. Fund launches for the week of December 28th, 2015 Fund launches for the week of January 4th, 2016 Reality Shares launches its second ETF (1/6): The Realty Shares DIVCON Leaders Dividend ETF (BATS: LEAD ) was launched just over a year after the company’s first offering, the Realty Shares DIVS ETF. “Unlike many dividend funds based on decades-old dividend history or yield, the new passive ETF features rules-based stock selection and weighting using a proprietary dividend health rating methodology, DIVCON, which systematically ranks companies’ future dividend growth prospects based on a weighted average of seven factors,” according to a press release on Reality Shares’ site. WisdomTree rolls out 4 new Dynamic Currency ETFs (1/7): The following newly issued funds offer currency hedged exposure to international equities, each indicated in their names, and weighted by dividend yield: The WisdomTree Dynamic Currency Hedged International Equity Fund (BATS: DDWM ), the WisdomTree Dynamic Currency Hedged International SmallCap Equity Fund (BATS: DDLS ), the WisdomTree Dynamic Currency Hedged Europe Equity Fund (BATS: DDEZ ) and the WisdomTree Dynamic Currency Hedged Japan Equity Fund (BATS: DDJP ). iShares launches 3 Adaptive Currency Hedged ETFs (1/7): The iShares Adaptive Currency Hedged MSCI Japan ETF (BATS: DEWJ ), the iShares Adaptive Currency Hedged MSCI Eurozone ETF (BATS: DEZU ) and the iShares Adaptive Currency Hedged MSCI EAFE ETF (BATS: DEFA ) are new additions to the iShares lineup. Like the WisdomTree funds launched on the same day, these funds offer currency hedged exposure to international equities, but weighted by market capitalization rather than dividend yield. All 7 of these funds were launched on the BATS exchange. There were no fund closures for the weeks of December 28th, 2015 or January 4th, 2016 Have any other questions on ETFs or ETNs? Please comment below and I will try to clear things up. As an author and editor, I have found that constructive feedback is the best way to grow. What you would like to see discussed in the future? How can I improve this series to meet reader needs? Please share your thoughts on this first edition of the ETF Update series in the comments section below. Have a view on something that’s coming up or a new fund? Submit an article.