The Best New ETFs Of 2011

By Stephen D. Simpson, CFA | December 27, 2011 AAA

Although 2011 has not been a great year for the equity markets, investor jitters haven't stemmed the growing interest in ETFs. Nearly 300 new ETFs came into being this year, a pretty remarkable number considering that there are now about 1,400 ETFs in existence on U.S. exchanges.

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What were the best among these newcomers to the market? That's actually a somewhat difficult question to answer, as "best" can have many different meanings. Obviously an investor who has been waiting many years for a particular type of ETF will see its entry as a very good thing indeed. Any discussion of the best can, and arguably should, reference performance, but investors should also not overlook another significant detail - fund size. ETFs often need a certain critical mass to be viable and it seems fair to argue that a fund's assets under management is a reflection of just how well it meets a particular market need.

Unfortunately, it is not all that easy to quickly suss out the best-performing new funds of 2011. Popular public databases fall badly short when it comes to calculating year-to-date returns on funds that have been around for less than a year. Consequently, full disclosure demands the acknowledgment that this may, or may not, be a comprehensive list of the best-performing ETFs of viable size - said differently, a few better-performing funds may have slipped through the net.

One of the top, if not the best-performing, new ETFs has been the PowerShares DB German Bund ETN (ARCA:BUNL). This fund (which is actually an ETN), looks to reproduce the performance of German-issued bonds with a relatively narrow range of maturity (8.5 to 10.5 years). (For related reading, see 6 Popular ETF Types For Your Portfolio.)

The iShares High Dividend Equity Fund (NYSE:HDV) and PowerShares KBW Regional Banking (ARCA:KBWR) have both also done well since inception, with the former up 5.6% and the latter up 6.4%. The performance of the High Dividend Equity fund is perhaps not so surprising; with uncertain markets and low interest rates, dividend investing has been a solid strategy this year. The performance of the regional banking fund is more surprising, given the very poor general performance of regional bank stocks this year.

Finishing up this admittedly incomplete performance list are SPDR Nuveen S&P High-Yield Municipal Bond (ARCA:HYMB) and Schwab U.S. Aggregate Bond ETF (ARCA:SCHZ). Bond funds have done well this year, and these funds are up about 5 and 3%, respectively, since inception.

Size Matters
An ETF's ability to attract investors and garner significant net inflows is another very valid metric in determining the "best" new funds of 2011. After all, a fund may perform well but if it cannot garner assets, that performance doesn't make much impact on the broader markets.

There is one already familiar name on this list - the iShares High Dividend Equity Fund already has more assets than any other fund that began in 2011 and the fund inflows have been impressive as the fund closes in on an AUM of $800 million. Close behind is the PowerShares S&P 500 Low Volatility Portfolio (ARCA:SPLV) which has likewise brought in over $700 million under management.

Other new funds that have accumulated significant assets include Vanguard Total International Stock ETF (Nasdaq:VXUS) and Wisdomtree Asia Local Debt Fund (ARCA:ALD).

The Bottom Line
With relatively few areas left to cover with ETFs, it is probable that more and more new ETFs will be me-too offerings with relatively little to separate them from their rivals apart from expense ratios and the brokers that have signed on to offer them free of commissions. By no means does that mean that there will be a major decline in new offerings, though, as there is simply too much money out there for funds to quit trying. Instead, investors can expect more and more competition between fund sponsors and perhaps look forward to a larger array of cheaper options as a result. (For related reading, see Using ETFs To Build A Cost-Effective Portfolio.)

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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