Five ETF Predictions for 2009

Whenever the subject of predictions or forecasts comes up, I’m always reminded of one of my favorite quotes:

“We have two types of forecasters: Those who don’t know - and those who don’t know they don’t know.” - John Kenneth Galbraith

With that disclosure out of the way, I would now like to offer up my five predictions for the ETF industry in 2009.

1. Assets under management (AUM) in ETFs/ETNs will increase by more than $100 billion in 2009. The “official” number for year-end 2008 U.S. AUM has not been released yet, but I expect it will be slightly above $500 billion. The ETF industry is alive and well. I expect it to grow by 20% or more in 2009.
2. New ETF introductions will continue to slow in 2009. ETF IPOs reached a peak in calendar year 2007 with the introduction of about 290 new products on U.S. exchanges. That number slowed to about 230 in 2008. I predict that fewer than 200 new ETFs and ETNs will be launched in 2009.
3. ETF closures will set a new record in 2009. A total of 58 ETFs were delisted in 2008. This was a huge increase from prior years as the lifetime toll was only five at the beginning of 2008. There are currently 139 ETFs on my Deathwatch List for January. Many of these, along with ones not on the list yet, will not make it to the end of the year. The record set in 2008 will be shattered.
4. 2009 will be the first year with a net decline in the number of ETFs/ETNs. This is probably the least likely of my five predictions to come true. However, it will make for a good race as we monitor the number of new ETFs versus the number of closures throughout the year. It’s likely to be close.
5. There will not be any 4x ETFs introduced. Many investors were skeptical about the introduction of 2x ETFs. Even the SEC took their time with these. I believe that the original ProShares filing for 2x ETFs dates back to 2001, and it was 2006 before they were approved and released to the market. In late 2008, Direxion Shares introduced 3x ETFs. These things have a lot of juice! I wrote about one of them in November when it doubled in less than 7.5 hours. Now, what do you think would happen if that action took place in the span of a single market day instead of two? Or, what would happen if it was 4x leveraged instead of 3x? The answer is: the inverse version of the ETF would go to zero. A +25% one-day move in an underlying index will cause a 4x leveraged long ETF to double in price while the inverse version goes to zero. No ETF sponsors wants to risk that happening to one of their products.

Those are my five ETF industry predictions for 2009. We’ll look back in a year and see how many came true.

Disclsosure: no positions

Comments

[JabaDaHut:]

Ron, that was the most useless thing I've ever read. I have an ETF prediction for you. In 2009 the SEC will announce an investigation in to why 2X and 3X ETFs always manage to lose move over the long term no matter what the market does. SKF/UYG, DIG/DUG, FAS/FAZ just to name a few. Leveraged ETFs will be banned in 2009.

Jan 07 09:26 AM

[Ron Rowland:]

Jaba, the math behind products that reset their leverage on a daily basis has been understood since 1993 with the introduction of Rydex Nova (RYNVX). Leveraged products (ETFs & Mutual Funds) are not long-term investments and will not produce 2x (or 3x) the underlying index for any period longer than a day. I would hope that the SEC has better things to do than to investigate mathematics. I guess DTO is a failure too, since it returned 500% of its underlying index last year instead of just the 200% that you probably believe it should have. The lesson for everyone here is not to use products you do not understand.

Jan 07 05:37 PM