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Portfolio > ETFs

The Best and Worst ETFs of 2016: Morningstar

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Two hundred twenty new exchange traded products launched in 2016 but many are too niche, complex or high priced for the average investor, according to Ben Johnson, Morningstar’s director of global ETF research.

At the same time 114 ETPs – the label includes exchange-traded funds and exchange-traded notes – closed in 2016, setting a record. Since the first ETF was launched in 1993 – the SPDR S&P 500 ETF (SPY) – nearly 23% of them have closed.

Against this backdrop of ETP openings and closings Morningstar has just published a short list of the best and worst new ETFs of 2016.

Best New ETFs

Johnson notes that best-of-breed funds have low fees, a “solid sponsor” and offer exposure to a broad base of securities within an asset class. Ideally they also show signs of long-run viability.

Given these attributes, his top picks for ETFs that debuted in 2016 are the Vanguard International Dividend Appreciation ETF (VIGI) and NuShares Enhanced Yield U.S. Aggregate Bond ETF (NUAG).

Vanguard International Dividend Appreciation ETF

VIGI is Morningstar’s “valedictorian of the ETF class of 2016,” writes Johnson. It’s a low-cost diversified “foreign cousin” of the Vanguard Dividend Appreciation ETF (VIG), which carries Morningstar analysts’ top gold rating.

VIGI has a 0.25% expense ratio – almost half the 0.47% median of its ETF peers — and tracks the Nasdaq International Dividend Achievers Select Index to focus on stocks with a long history of paying and growing dividends.

More than 80% of its stocks possess an economic moat, which is Morningstar’s measurement of a company’s competitive advantage, compared to just under 70% average for its peers.

Through the end of October VIGI’s return on invested capital of 13.62% versus 10.55% for average fund in category.

NuShares Enhanced Yield U.S. Aggregate Bond ETF

NUAG is a strategic beta, investment-grade, fixed income ETF from Nuveen, and the firm’s first ETF. It invests in government and corporate investment-grade debt, mortgage-backed and asset-based securities as well as U.S. dollar-denominated debt issued by foreign governments and corporations.

NUAG tracks the BofA Merrill Lynch Enhanced Yield U.S. Broad Bond Index, which allocates more weight to higher-yielding investment-grade bonds but includes rules-based constraints to keep the overall risk near levels of the broad market, and rebalances monthly.

“NUAG tries to juice the yield of a broad-based bond index while maintaining a similar level of risk,” writes Johnson. Just launched in September, “it has succeeded in both regards. That said it’s still early …. [but] NUAG is worth keeping an eye on.” The ETF has a 0.20% expense ratio.

Worst New ETFs

The worst ETFs launched in 2016 preyed on “investors’ impulse to chase what’s hot,” writes Johnson. They “tend to offer narrow and often overly complex exposures, charge high fees and have sponsors that prioritize salability over staying power.”

Morningstar’s top picks for the worst ETPs include two leveraged ETNs from Velocity Shares — VelocityShares 3X Long Crude Oil ETN (UWT) and VelocityShares 3x Inverse Crude Oil ETN (DWT) – and Spirited Funds/ETFMG Whiskey & Spirits ETF (WSKY).

VelocityShares Leveraged Crude Oil ETNs

The VelocityShares ETNs replace two other ETNs (UWTI and DWTI) from the same company that were delisted as of the close of trading on December 8 after Credit Suisse, the bank that had backed them, ended its arrangement with VelocityShares.

“Who needs to get exposure to 3 times the daily price movements in an oil index anyway?” asks Johnson.

Whiskey & Spirits ETF

WSKY is one of many new “thematic ETFs…covering a wide variety of trending topics,” writes Johnson, noting the difficulty in picking just one for his short list of the worst ETFs this year. But “none is more concentrated or more costly than WSKY,” writes Johnson.

One stock – Diageo (DEO) accounts for 23% of its portfolio and its top 10 holdings comprise 79% of its assets, according to Johnson.

In addition to a high risk of concentration WSKY charges a 75 basis point annual fee. “Leave this one on the shelf,” advises Johnson.

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