There's no denying ETFs are an innovative and effective product, which accounts for the sector's explosive growth over the past 10 years among both advisors on behalf of their clients and individual investors alike. But this explosive growth and resulting inventory too often creates confusion for you and your clients. In the first of a series of interviews with the leaders in the ETF industry, we asked Tom Lydon, president of Global Trends Investmentsand editor and proprietor of ETFtrends.com, to explain where we are in the product's lifecycle, and where good deals can be found.
AdvisorOne: In 2009, The Wall Street Journal's Personal Finance columnist Jason Zweig said a major ETF shakeout would occur due to overcapacity and because ETFs with less than $50 million in assets are not self-sustaining. Has this shakeout occurred?
Tom Lydon: It's not really about liquidity or asset size; it's more about the underlying index and how often it is traded. "Real estate" in the space tends to fill up rather quickly, so new entrants and those late to the game have to find a way to differentiate themselves. For instance,T. Rowe Price was one company that was relatively late in entering the space. Rather than offering hot, new products, they instead relied on their performance and brand name as competent managers.
Although there have been a fair amount of closures in recent years, it's far from a shakeout. In an increasingly competitive industry that demands more and more originality from its products and a bigger marketing push from providers, closures aren't going to be unusual because not everything can catch on with investors. Investors ultimately will decide what works and what doesn't. Providers who close low-asset funds are acting responsibly and maintaining their product lineups so that the highest-quality ones remain on the market.
AdvisorOne: What ETFs should advisors consider now? What looks appealing?
Tom Lydon: In fixed income, advisors should look at SPDR Barclays Capital High Yield Junk (JNK) and iShares iBoxx High-Yield Corporate Bond Fund (HYG). Now is a great time for corporations: liquidity is returning to the markets, default rates are dropping, they're sitting on nearly $2 trillion in cash and fourth-quarter earnings are coming in strong. An improving environment coupled with yields that remain handsome (JNK boasts a 7.48% yield; HYG has a 7.72% yield) make high-yield corporate debt an appealing destination if you don't mind the risks.
Also, ProShares UltraShort 20+ Year Treasury (TBT) should be considered. The economy is improving, joblessness is coming down
