Among the many new launches, there were plenty of lumps of coal and a few diamonds to be found.
A version of this article was published in the October 2016 issue of Morningstar ETFInvestor. Download a complimentary copy of ETFInvestor here.
As of Dec. 6, there were 220 new exchange-traded products (inclusive of exchange-traded funds and exchange-traded notes) launched in the U.S. market in 2016. This places 2016 fourth behind 2007, 2015, and 2011 in terms of total number of new ETP launches in a given calendar year. There are now a total of 1,957 ETPs available to investors. Since SPDR S&P 500 ETF SPY was launched in 1993, 2,531 ETPs have been brought to market. This means that nearly 23% of them have since been closed.
Though there are plenty of choices on the ever-expanding menu, investors' tastes are fairly basic. Of the 1,957 ETPs on offer, the top 100 as measured by assets under management accounted for 74% of the $2.5 trillion invested in ETPs at the end of November. What does this mean for investors? First, it means that the best options are already out there and have been for some time, right in front of your nose. Second, it means that the odds of something better coming to market grow slimmer with time. It's going to be awfully difficult to beat access to the entire U.S. stock market at a cost of 0.03% per year or the U.S. investment-grade bond universe for 0.04%.
Here, I take a look at the class of 2016 and call out what I believe are the best and worst new launches of the year.
It is difficult to stand out in this cramped landscape. If anything, standing out can be detrimental, as the traits of successful new entrants are no different than those of existing best-of-breed funds: broad-based asset-class exposure, low fees, a solid sponsor, and--ideally--early signs of long-run viability (I want to make sure these funds will be around three, five, and 10 years from now).
Vanguard International Dividend Appreciation ETF VIGI
VIGI is the foreign cousin of Vanguard Dividend Appreciation ETF VIG, which has a Morningstar Analyst Rating of Gold. Like its U.S. relative, the fund boasts a low fee, a sensible process, and a solid parent. At 0.25%, VIGI's price tag is well below the median levy of 0.47% taken by its ETF peers (which I've defined as foreign-equity funds that have been tagged with our "Dividend Screened/Weighted" strategic-beta attribute). This is also a fraction of the 1.14% median toll taken by members of the foreign large-blend Morningstar Category. As is the case with VIG, the fund's underlying index--the Nasdaq International Dividend Achievers Select Index--looks to home in on stocks that have a long history of paying and growing their dividends. As is also the case with VIG's index, the methodology document for this fund's bogy is lacking detail. What we know for sure is that in both cases, the result of the process defined by the indexes' guiding principles is a portfolio of high-quality stocks. As of the end of October, the stocks in VIGI's portfolio had an average return on invested capital of 13.62%, versus 10.44% for the average fund in its category. Additionally, 80.2% of VIGI's portfolio was invested in stocks that our analysts deem to have wide or narrow Morningstar Economic Moat Ratings, versus 69.6% for its average peer. Economic moats are evidence of a high-quality firm with sustainable competitive advantages.
All told, I think that VIGI is the valedictorian of the ETF class of 2016. The fund is a compelling option for investors looking for a low-cost, diversified source of dividend income from overseas markets.
NuShares Enhanced Yield U.S. Aggregate Bond ETF NUAG
NUAG is the first ETF from fixed-income stalwart Nuveen. The fund joins a growing roster of strategic-beta fixed-income ETFs that are looking to deliver something more than what investors might get from a more traditional, market-capitalization-weighted bond index. For its part, NUAG tries to juice the yield of a broad-based bond index while maintaining a similar level of risk. In its very short life--the fund was launched in September--it has succeeded in both regards. That said, it's still early, and competition in the space is stiff. There are dozens of Morningstar Medalists in the intermediate-term bond category and more-vanilla passive peers are available at a fraction of the cost. Still, for those looking for just a little more than what they might get from a purely passive exposure and something that will also be a little more reliable (given that it tracks an index), NUAG is worth keeping an eye on.