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Portfolio > Alternative Investments > Hedge Funds

The ETF Advisor: New ETFs in 2010 for Hedge Funds, Foreign Stocks and MLPs

By Vaughan Scully

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Like the elves in Santa’s workshop who toil year-round making gifts for well-behaved children, providers of exchange-traded funds have been hard at work this year hammering together a wide variety of new funds in hopes that investors will begin stuffing them into their portfolios.

Among the new ETFs hitting the market are several actively managed ETFs, sector and small cap ETFs for foreign markets, and exchange-traded notes (ETNs) that track shares in master limited partnerships (MLPs).

As of the end of June 2010, there were 872 U.S.-listed ETFs, according to Investment Company Institute data, with combined assets of $772 billion, a 9% increase from the 797 ETFs trading at the end of 2009, and 20% more than the 725 ETFs trading at the end of June 2009. Of the net 75 new ETFs that opened for business in 2010, emerging markets saw the greatest gain, with a net increase of 22 ETFs. Corporate and municipal bond ETFs also showed strong growth, with net gains of nine and seven funds respectively.

The initial appearance of ETFs using active, rather than index-tracking, management in 2008 and subsequent launch of several more actively-managed ETFs in 2009 raised expectations that many more such funds would soon begin trading, but so far only a handful have actually made it to listing. Bethesda, Maryland-based AdvisorShares launched two actively-managed ETFs in July 2010 – the WCM/BNY Mellon Focused Growth ADR ETF, which employs a portfolio management team to invest in large cap American Depositary Receipts, and the Mars Hill Relative Value ETF, which establishes long equity positions in regional markets expected to outperform the global equity market and short positions in regions expected to underperform. Also, Allianz’s PIMCO unit launched the PIMCO Short Term Municipal Bond Strategy Fund in February.

Filling a niche among highly popular international ETFs, iShares listed nine new ETFs based on the MSCI ACWI family of sector indices, including consumer staples, consumer discretionary, energy, health care, utilities, telecom, materials, information technology and industrials. These are the first sector funds that combine developed and emerging markets, iShares said. The new funds bring iShares total fund count to 205.

Also seeking to capitalize on interest in foreign stocks are a rash of new small cap country ETFs. Joining the small cap ETFs for Brazil, China, and Japan, Rye Brook, New York-based IndexIQ has opened four such funds for South Korea, Canada, Australia, and Taiwan in 2010. In addition, Ridgewood, New Jersey-based Emerging Global Advisors launched the Indxx India Small Cap ETF. Advocates for these funds argue that since the large-cap companies of most countries are now multinational in scope, small caps give more direct exposure to the local economy.

Along with mounting demand for foreign equity exposures, ETF investors are looking for current income, with assets in fixed income ETFs surging in the first six months of 2010. However, with interest rates extraordinarily low, the yield from these funds is often disappointing. When JP Morgan Chase opened the Alerian MLP Index ETN in early 2009, which invests in shares of MLPs that pay substantially all of their income in dividends, it was mobbed by investors for its yield of about 8% at the time. Since then, it has attracted $1.5 billion in assets.

Seeking to share in this bounty, several other similar funds were launched in 2010. UBS brought three MLP-based exchange-traded notes to market in 2010. The E-TRACS Alerian Natural Gas MLP Index owns the 15 largest natural gas MLPs; the E-TRACS Alerian MLP Infrastructure Index owns shares of MLPs that “earn the majority of their cash flow from the transportation and storage of energy commodities; and the E-TRACS 2xMonthly Leveraged Long Alerian MLP Infrastructure Index offers leveraged exposure – targeting monthly rather than daily returns – to the same index. Credit Suisse launched the Cushing 30 MLP ETN in April, which owns an equal-weighted portfolio of 30 MLPs.

ETF providers are betting interest in new ETFs will hold strong in the future, and have more than 800 new ETFs in various stages of planning, according to iShares parent BlackRock’s “ETF Landscape” report for the second quarter of 2010. Those new funds will include 19 new funds expected from Vanguard, including ETF shares of its massive Standard & Poor’s 500 index mutual fund.

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