The year 2011 promises to be an exciting one in the financial market, as many new financial products become available for the retail investor. These new investment opportunities offer ways for the average investor to make more precise bets on the market, reduce fees and gain greater diversification. (These funds burst onto the scene in 1993 and have continued to provide new opportunities for investors since. Check out ETFs: How Did We Live Without Them?)
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- Actively Managed ETFs
Actively-managed ETFs have so far failed to attract significant attention from investors. This may be about to change, as Barron's reports that many new active ETFs will join the market in 2011. A growing number of active choices on the market may serve to attract more investors to the investment group.
While the ETF market reached a new high of $1 trillion in invested funds in 2010, the vast majority of those assets are invested in passive index ETFs. The relatively new actively managed ETFs comprised only $3 billion of total assets in the ETF market.
For actively managed funds, a track history of good performance is important to attract investors. All of market's 33 existing actively managed ETFs were launched within the past two years, after the SEC approved the creation of these funds. The first actively managed funds (launched in early 2008) will complete their third year of performance history in 2011. This may be a turning point for adding new investors who were hesitant to buy actively managed funds before their ability to outperform the market was tested.
- Focused Foreign Investing
With the continued economic uncertainty in many developed countries, in 2011 many investors are looking for the ability to make more focused investments in international companies.
There are a growing number of country-specific funds entering the market. Previously, investors did not have as many choices for placing bets on specific countries, outside of a few popular choices: Brazil, Russia, India and China. In particular, there is increasing interest in what are being called the CIVETS countries: Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa.
In addition, investors are gaining new options for investing in particular sectors within certain countries and regions. For example, investors can now buy a European Financial fund, Brazilian infrastructure fund or a Chinese technology fund. Look for many more of these focused foreign investment funds to come online in 2011.
- Commodity ETFs
Investments in gold and oil ETFs continue to flood the headlines, but there is a much broader array of commodity ETFs coming on the market in 2011. In the past, it was very difficult to access this market, which often involved making complex investments in futures or holding the commodity directly. With the rising number of commodity ETFs, not only it is now possible to buy a variety of commodities as a small investor, but more importantly, it is easier to do it in a diversified way. (Find out which currencies are most affected by fluctuations in gold and oil prices and improve your trading. Read Commodity Prices And Currency Movements.)
Commodity ETFs on the market today allow bets on the price of corn, timber, food, uranium, platinum and many other natural resources. As commodities have risen in importance, many are beginning to see this as a new asset class to be held as a small portion of an investment portfolio. Primarily, these investors seek diversification benefits, since commodity prices should be largely uncorrelated with other movements in the financial markets. How a commodity ETF invests is important to realize this goal.
Some commodity ETFs invest directly in the physical commodity and store it in a facility controlled by the fund. Other funds invest in a basket of companies that produce the commodity, exposing investors to similar risks as in the stock market. Still others invest in futures contracts on the commodity, which are difficult for the average investor to fully understand.
Each approach has advantages and disadvantages depending on the commodity, so it is not easy to say one approach is always better than another. The main point is that investors should study a commodity fund's holdings carefully to make sure they understand the true nature of the fund they plan to buy.
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The Bottom Line
These new investments offer ways for financially sophisticated investors to manage their funds in ways that were previously inaccessible. With each of these new products comes the responsibility of doing your homework and fully understanding both the potential risks and rewards of these new ways of investing before committing your hard-earned money. (We provide some classic and lesser-known titles to add to your collection. See Investing Books It Pays To Read.)
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