Morningstar analyst Samuel Lee names the best and the worst ETFs in 2011 before pointing out some key trends. He praises both BlackRock's iShares and Invesco's PowerShares for thriving despite a difficult year in the markets. Indeed, he points out that the ETF industry topped the mutual fund market by receiving an extra $100 billion of inflows.

Lee points to the best among the some 1,400 ETFs as being iShares High Dividend Equity (HDV) and PowerShares S&P Low Volatility (SPLV). Both, he notes, are reasonably-priced low-volatility value funds. Lee also admits that he looked at asset flows as one clue as to which ETFs are best, "as I've found that good ideas tend to attract the bulk of assets."

These funds have the lowest fees in their respective categories. Lee adds that their success pushed Russell Investments to slash 30 basis points off the fees on its own first-mover, low-volatility ETFs.

At the bottom of Lee's list is UBS E-TRACS 2x Wells Fargo Business Development Company ETN (BDCL), which he calls the worst ETF this year. The ETF earned the spot due to high expenses and "questionable investment merit." It also failed to use its key advantage -- the extremely favorable tax treatment for an ETN, claims Lee.

Lee sees this year as a good and interesting year for ETFs, because they are "growing and innovating and disrupting." He notes several trends, including:

"Factor" ETFs from shops such as Russell with its investment style, momentum, volatility, and beta ETFs and Credit Suisse's ETNs that replicate hedge funds. He also points to startups QuantShares and FactorShares. He predicts that factor ETFs will catch on with institutional investors and that they are poised to steal market share from hedge funds.

Actively managed ETFs are getting a boost from Pimco and its Total Return fund clone. "Many failed to grasp its [Total Returns] true significance," writes Lee. He sees the clone as "a sign of things to come" as Pimco's institutional customers are able to shift some $100 billion from the fund to the ETF version of Gross' flagship portfolio. 

Edited by: HFD


Stay ahead of the news ... Sign up for our email alerts now
CLICK HERE