Markets are impossible to predict. Who knew that in 2011 Germany would emerge as a perceived safe haven for investors seeking cover from the European financial crisis? Last year through the end of November, exchange traded products offering German equity exposure attracted inflows of about $17.4 billion – or 85% of all flows into equity products in Europe, according to BlackRock’s November ETF Landscape report.
I think of these types of investment situations whenever I’m asked by investors or reporters why the ETP industry continues to roll out new products that slice the market into thinner segments.
In 2011, 306 new ETPs launched as of December 28, according to HEARSAY. With a backlog of more than 1,000 filings at the Securities and Exchange Commission, I’m not expecting a slowdown in 2012.
Why does the industry continue to roll out so many new products, and how should investors consider using them?
First, it’s important to remember that not all investment products are suitable for all investors. Despite the proliferation of exchange traded products, nearly 56% of assets under management still sit in developed equity ETPs, according to the BlackRock report. Add in emerging markets equity, and that number rises to 69%. While new providers continue to enter the ETP arena, the report states that iShares, State Street Global Advisors and Vanguard accounted for 67% of global ETP assets under management as of the end of November.
As the numbers show, today the majority of ETP assets are sitting with established providers in established asset classes.
But with ETPs growing in popularity, it is no surprise that providers are eager to roll out products that offer investors access to new segments of the market.
In addition, the users of ETPs are incredibly diverse, and the introduction of new products can allow various investors a means to implement tactical investment decisions in response to changing market conditions. In some cases tactical can mean holding a position for hours or days in order to reduce risk to a portfolio. For other investors (like advisors) tactical can mean shifts in sub-asset allocation on a quarterly basis.
The point is that each investor has different goals, and ETPs can be used to help achieve those goals. As with any investment decision, it makes sense to look before you leap and do your homework. Make sure the ETP provider you are using is one you can trust, with a track record and a commitment to transparency. Take the time to understand what it is that the ETP you are purchasing holds and how it matches up with your tolerance for risk. Just because an ETP exists, does not mean it belongs in your portfolio.