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Four Themes For ETF Investors In 2011

|Includes:iShares MSCI Emerging Markets ETF (EEM), VWO
Here we are the start of another new year and from an investor's perspective, this is always a good time to take a look back while also glancing forward. With ETFs, this is an especially worthwhile endeavor because the industry is so dynamic and to say 2010 was a boffo year for the exchange traded products business might just be an understatement.

Among the list of accomplishments for the industry in 2010 are the introduction of more than 170 new funds and the climb above $1 trillion in assets under management. Statistics like that are just a starting point because it is becoming more clear by the day that ETFs have been legitimized as an asset class and mutual funds are quite vulnerable to the continued success of ETFs.

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That's a good segue because today I want to take a look at, in no particular order, four themes ETF investors need to keep an eye on in 2011.

  1. Emerging Markets: Does The Party Continue?

    The answer is probably "yes," but the key is not only knowing that emerging markets will continue to be a desired destination for inflows, but also knowing WHAT markets are going to outperform. Sure, an investor could have put money into the iShares MSCI Emerging Markets Index Fund (NYSE: EEM) or the Vanguard Emerging Markets Stock ETF (NYSE: VWO) in 2010 and done alright by getting exposure to a broad group of emerging markets. On the other hand, as the chart below shows, picking the right individual markets was the better strategy and that is likely to continue this year.

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  3. Price Wars

    ETF issuers and brokerage houses are taking a page from the airlines' playbook and when one does something to cut commissions on ETF trades, others seem to follow suit. In fact, a recent Bernstein analyst report noted low, or in some cases, no commissions are hurting the brokers. Bad for them, good for you. Combine the popularity of ETFs with the fact that several brokers and ETF issuers already offer free trading on ETFs and the environment is perfect to be trading these products. I expect more of the same in 2011.

  4. New ETFs

    It's hard to know exactly how many new funds will come to market this year and history has shown an issuer filing to introduce a new fund doesn't mean that fund will ever see the light of day, but this much is clear: There is no dearth of new ETF ideas. I recently saw a noted ETF analyst compare new ETFs to stock IPOs and he made a good point, saying that a new ETF should not be treated the same way as an IPO. You don't need to be in on a new ETF on the first day or first week for that matter. That said, you don't want to wait too long with the right fund. As ETF Profit Report subscribers can attest to, new ETFs can deliver stellar returns and do so quickly.

  5. Increased Awareness Of ETFs

    I'm not convinced that this theme will directly impact the performance of individual ETFs, but consider this: Exchange traded products are approaching their 20th anniversary in the U.S. and most investors still don't know much about them. A recent report by Mintel says that six in 10 investors ignore the asset class altogether simply because they don't know what ETFs are. The report goes on to say that only 54% of current ETF investors feel comfortable with their knowledge of ETFs.

This means there is still tremendous growth potential for the ETF business and the smart firms are going to educate their clients about these products. The more informed an investor is about ETFs, the more likely he or she is to invest in one, and that's good news for issuers, brokers and investors. Let's just say mutual fund issuers would prefer investors remain ignorant about ETFs and leave it at that.

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Stocks: EEM, VWO