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ETF Specialist

The Most Popular ETF Debuts of 2014

Diverse new launches have covered the gamut from income to strategic beta to bespoke offerings.

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Despite recent global unrest and questions about global growth, United States equity markets remain near record highs, and the U.S. economy continues to strengthen, with still-declining unemployment, solid growth, and modest inflation.

Much-ballyhooed predictions of higher interest rates haven't yet come to pass, and with U.S. equity market valuations at such elevated levels, investors with extra cash to put to work may be asking themselves where to find compelling investment opportunities.

Often, a look at recent exchange-traded product launches--and there have been more than 155 in 2014 alone--can offer a great source of investment ideas.

Granted, ETP launches sometimes wind up being trailing indicators, as it takes a minimum of several months between product registration and launch. At the same time, recent product roll-outs that have attracted meaningful assets--assuming those assets were not simply redirected from an issuer's existing products--can offer investors a sense of where providers have done a successful job anticipating investor interest.

A Diverse Set of Launches
A look at ETPs that have launched since the start of 2014 and that have gathered $75 million or more in assets up to now reveals a highly diverse product set that defies easy categorization. Some are broad, low-cost exchange-traded funds devoted to specific geographic regions, while others are income vehicles. Others fall into the strategic-beta realm, aiming to tap factors that academic research has shown are robust sources of performance. There's an actively managed ETF in the mix. And there also are close to a dozen "bespoke" ETFs, which are funds created by investment firms with specific, existing clients in mind.

Here is a look at six new launches that have gained traction with investors.

Broadening the Core: Low-Cost iShares Funds Devoted to Europe and Asia-Pacific
In June, iShares announced that it would double the size of its "iShares Core" lineup of building-block ETFs, including rolling out four new ETFs and rebranding six others. (Although the new funds are part of iShares' Core suite, the collection of 10 new and rebranded funds was dubbed iShares Core Select ETFs.)

Among the new ETFs, investors have clearly taken a shine to iShares' new low-cost offerings devoted to Europe and Asia-Pacific. Both new ETFs clock in at much lower prices than existing, higher-priced (but far more liquid) iShares offerings. IShares Core MSCI Europe ETF (IEUR), which levies a 0.14% fee, is a clear substitute for  iShares Europe (IEV) (0.60%), while iShares Core MSCI Pacific ETF (IPAC) (also 0.14%) is a substitute for  iShares MSCI Pacific ex-Japan (EPP) (0.50%). Both new ETFs track slightly different indexes than the larger incumbent funds, but cost-conscious investors should expect the performance differences to be minimal.

A PIMCO ETF (Not the One You're Thinking Of)
As Bill Gross' departure from PIMCO and the outflows from  PIMCO Total Return ETF (BOND) have captured the spotlight recently, a different actively managed ETF that PIMCO launched earlier this year has gained attention and assets from investors who, in the current environment, clearly have decided to turn their eyes more toward fixed-income products at the shorter end of the duration spectrum.

In January, PIMCO rolled out PIMCO Low Duration ETF (LDUR), whose manager, Jerome Schneider, on Sept. 26 succeeded Gross as one of the managers of a similar mutual fund,  PIMCO Low Duration (PTLAX) (prior to Sept. 26, Schneider was not a named manager on the mutual fund, but he did manage a large chunk of the fund for several years). The Morningstar Analyst Rating for the actively managed mutual fund currently is Under Review, as Morningstar's mutual fund analysts have decided to re-evaluate Morningstar Analyst Ratings for all PIMCO funds. However, Morningstar does not assign Morningstar Analyst Ratings to ETFs. Despite the upheaval at PIMCO, we see no cause for concern with LDUR, as Schneider has been and continues to be the manager of the ETF, which aims for an average portfolio duration of one to three years based on PIMCO’s forecast for interest rates.

To sweeten the pot for potential investors, PIMCO late last month cut the fee for LDUR to 0.49% from 0.57%. That decrease was not related to the Gross departure.

Seeking Sectors With Momentum
First Trust has broadened the strategic-beta landscape this year with the launch of two passively managed, fund of funds ETFs that use momentum strategies to select underlying ETFs.

Investors' interest in momentum strategies is not surprising, as stocks with positive momentum historically have outperformed in nearly every market studied over long time horizons.

One of these ETFs, First Trust Dorsey Wright Focus 5 ETF (FV), has garnered close to $600 million in assets despite a steep 0.95% price tag. FV tracks an equal-weight index managed by Dorsey, Wright & Associates that uses a momentum strategy to select sector ETFs that the index provider believes have the greatest potential for upside. The benchmark scrutinizes First Trust’s sector and industry ETFs to try to find the ETFs with the best momentum. Each week, the index provider ranks each of First Trust's sector and industry ETFs to determine which ones have the best opportunity to outperform. Although the index methodology calls for conducting a relative strength analysis on a weekly basis, the ETF's holdings change when any one of the five underlying ETFs falls sufficiently out of favor, based on relative strength, versus other First Trust sector and industry ETFs. Then, Dorsey, Wright periodically rebalances the index to make sure each position is equally weighted.

In July, First Trust debuted First Trust Dorsey Wright International Focus 5 ETF (IFV), which follows a similar strategy with First Trust's country- and region-based ETFs that have the highest level of relative strength and thus momentum. IFV is far smaller than FV (just $42 million in assets as of this writing), and charges 1.10%.

Other large momentum ETFs abound. PowerShares also has a relationship with Dorsey, Wright and recently rebranded some of its U.S. equity sector ETFs into individual sector momentum ETFs. The firm also issues  PowerShares DWA Momentum ETF (PDP), which charges 0.74% and does not focus on any one sector. Another non-sector-oriented momentum ETF is iShares MSCI USA Momentum Factor (MTUM), which by contrast charges a razor-thin 0.15% fee.

A New Income Option
It’s surprising that few income-oriented ETFs launched in 2014 have gathered any assets. However, that's likely a testament to the broad menu of income ETF options that investors already have before them.

One new income-oriented launch this year has been PowerShares Variable Rate Preferred ETF (VRP), which tracks a Wells Fargo index containing preferred stock and hybrid securities that are functionally equivalent to preferred stock. All the securities in the index pay a coupon or dividend that has a variable or floating rate.

While preferred shares typically pay strong dividends (the fund’s 30-day SEC yield as of Oct. 9, 2014, was 4.79%), the new PowerShares fund also clearly was created with the variable or floating-rate requirement as a way for investors to benefit from rising interest rates.

VRP charges 0.50%.

The Rise of the 'Bespoke' ETF
Over the past several years, the notion of the "bespoke" ETF has entered the investment industry's lexicon. Begun in the world of exchange-traded notes, the concept of a "bespoke" product is simple: An issuer creates a product that is traded on an exchange but that has a specific client or clients in mind. In many cases, bespoke ETPs begin trading with significantly greater assets than other ETPs.

Since the start of 2014, two ETF issuers have rolled out bespoke ETFs: Vident and WBI. Late last year, Vident, which is a unit of Georgia-based Ronald Blue & Co., rolled out Vident International Equity (VIDI), a passively managed, risk-weighted ETF that tracks an index that assigns greater weights to companies deemed more attractive from a valuation, momentum, and growth standpoint. Vident followed that bespoke ETF launch up with Vident Core US Equity (VUSE), a U.S. stock ETF that charges 0.55% and tracks an index that seeks to risk-balance company exposures by sector and also identify companies with strong governance, higher relative quality, and positive momentum.

Finally, 10 actively managed bespoke ETFs were launched in August by New Jersey based registered investor advisor WBI Investments, under its WBI Shares brand. The active ETFs are managed through computer models that offer investors exposure to portfolio allocations that shift to cash as risk rises. There are four U.S. small- and mid-cap ETFs, four U.S. large-cap ETFs, and two multiasset funds.

Below is a list of U.S. ETFs that have launched since the start of the year with at least $75 million in assets.


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Robert Goldsborough does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.