10 ETF Trend Predictions for 2011

by: Tom Lydon

Just like we did last year, it’s time again to go into the dark closet, get out the crystal ball, dust it off and look inside. What does the ETF industry have in store for us for 2011? And more importantly, will we fare as well with our predictions as we did for 2010?

1. Small-caps will dust large-caps. Historically, small-caps have outperformed large-caps coming out of economic downturns. That’s been true so far this time around, too. We expect this trend to continue in 2011 as the economic recovery gathers steam.

2. Commodity demand will intensify. Continuing what they started in 2010, commodities will continue to be hot in 2011. A combination of a growing population, a rising emerging market middle class and investment demand will continue to support prices.

3. The Federal Reserve will hike interest rates. Okay, we predicted this one last year and we were a bit early. But this year, as the economy gets better, the Fed will raise rates. If you’re holding long-term bonds, be prepared to act when it happens.

4. The United States is where it’s at. The conventional wisdom has lately held that if you don’t have an allocation overseas, you’re missing something. While emerging markets turned flat in the fourth quarter, the United States gained a fair bit of strength in the last quarter of 2010 that we think will hold in the new year, thanks to improving earnings, corporate cash and investor confidence in the domestic economy.

5. Tech ETFs and the Nasdaq will be stars. Once again, the Nasdaq is the year’s top-performing index, gaining 20% this year. But after jumping more than 53% in 2009, this year’s numbers look decidedly lackluster. In 2011, look for technology ETFs to become market stars once again, thanks to an explosion of personal devices and a resumption of corporate IT spending.

6. There will be a physically-backed ETF explosion. No longer content to offer physically-backed gold, silver, palladium and platinum ETFs, providers will launch a slew of other physical funds. Most hotly anticipated are the aluminum and copper funds, which are still in registration. We predict that they’ll get the go-ahead in the first quarter.

7. ETFs will get even cheaper. Though there will be an eventual bottom to both ETF expense ratios and trading commission costs, we’re not there yet. TD Ameritrade’s (NASDAQ:AMTD) move to offer 100 ETFs commission-free is a first step; we predict we’ll see even more of the same in the coming year. And those price wars? Look out below for falling expense ratios!

8. Actively managed ETFs catch on. Active management has struggled to really catch on with investors. But one area of active management that proved its worth in 2010 was fixed-income. Having the flexibility to make portfolio adjustments as economic conditions change proved to be a valuable commodity this year, and we think investors will get wise to this and give active bond funds a boost. Active management first burst on the scene in April 2008, so we think investors will be viewing them with a keen eye.

9. ETF critics will back off. This year, the Kauffman Report, Bogan Report and BusinessWeek’s article about commodity ETFs took the industry to task. Although there will be increased and welcome critical thinking when it comes to ETFs, we predict that people will finally get educated and stop being scared of them.

10. ETF assets will continue the uptrend and hit $1.5 trillion. ETF assets finally hit $1 trillion in late December. We predict that they’ll not only stay there, but they’ll build on that. A recent Mintel Comperemedia study showed that most investors don’t know what an ETF is; if they were able to hit $1 trillion with so few knowing, imagine the possibilities as more people learn.

Here’s to a great 2011!