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ETFs by the Numbers in 2009

The highs, lows, successes, and failures of ETFs in 2009.

Bradley Kay, 01/11/2010

One of the things I love most about the ETF universe is its incredible coverage of global capital markets and the cornucopia of index products that seem to fill nearly every niche. This variety not only provides a tool for nearly every investment thesis but also allows us to take the pulse of nearly every market through the performance and asset flows of ETFs. In the crazy year of 2009, that pulse had plenty of palpitations and even a few arrests. We wanted to take this chance to highlight some of the oddball statistics and interesting patterns that showed up in a year for the record books.

Let's start this review out with the highest-returning non-leveraged ETF of 2009: Market Vectors Coal ETF KOL, with a whopping 145% return for the year. Didn't see that one coming? It's OK, neither did anyone else. The fund had only $168 million in assets at the end of December 2008 and even experienced small net outflows through the first four months of 2009. Raw industrial materials were the great returners this year after 2008's incredible beating, with some of the other top returns coming from Market Vectors Steel ETF SLX and iPath DJ-UBS Lead Sub-Index ETN LD. Even among contrarians searching for bargains at the beginning of the year, few were willing to place bets on these extraordinarily risky concentrated funds for fear that we had not yet seen bottom.

Instead, the contrarian money stayed in broader emerging-markets funds and was also very richly rewarded for it. Market Vectors Russia ETF RSX started the year with more than $400 million in assets and ended it with $1.4 billion, after healthy inflows and an even healthier 139% rebound from last year's lows. The fund that produced the most wealth for shareholders, hands-down, was iShares MSCI Emerging Markets Index EEM. This fund combined its massive $19.2 billion in December 2008 assets and $4.4 billion in inflows through 2009 with a year-long market return of 69% to generate more than $15.5 billion in wealth for shareholders (where I calculate the wealth generated as the difference between the 2009 year-end assets and the 2008 year-end assets, minus the net cash inflows to the fund through 2009).

EEM might not hold on to this crown the next time an emerging-markets rally comes around, because Vanguard Emerging Markets Stock ETF VWO looks like the new fund of choice with its 2009 inflows of $9.0 billion, as opposed to $4.4 billion for EEM. We're happy to see the tides shifting toward VWO because it offers the same index exposure at almost one third the price (0.27% annual expense ratio versus 0.72% for EEM). Until iShares cuts its fees to reflect the economies of scale from $40 billion in assets sitting in EEM, we expect the money will keep flowing to the Vanguard fund.

VWO did not experience the biggest inflows of 2009, however. That crown went to SPDR Gold Shares GLD, which took in $11.1 billion as investors tried to hedge out the risk of inflation from monetary easing around the world. This fear of potential inflation could also be seen in the $8.4 billion of inflows to iShares Barclays TIPS Bond TIP and the combined $6.3 billion that moved into the short end of the Treasuries curve via iShares Barclays 1-3 Year Credit Bond CSJ and Vanguard Short-Term Bond BSVPAGEBREAK

ETFs went from $540 billion in assets at the beginning of the year to $793 billion by December 31, but this year was not good for every provider. Several individual funds bucked this strong growth trend. The venerable S&P 500 tracker SPDRs SPY had an incredible $21.0 billion in outflows over the course of 2009 (compared with a Dec. 31, 2008, asset base of $93.0 billion), as investors seemed more than willing to take their gains from U.S. stocks after March and run. The same story in miniature affected iShares Russell 1000 Growth IWF, which gained 37% over the year but lost $2.3 billion to outflows, finishing up the year at $11.4 billion in assets.

At least those ETFs still showed strong gains for the year, making investors happy. A few large ETFs tanked this year and lost considerable amounts of money for investors. Given the strong rally nearly across the board, the fact that leveraged inverse funds top both the lists of biggest percentage losers and total money losers should be no surprise. However, these funds are typically used by institutional investors and other sophisticated traders who probably had hedging positions offsetting these losses or even producing net gains. The funds that really hit investors' pocketbooks were those that investors probably held on their own. In that category, the second-biggest wealth-destroyer for 2009 was iShares Barclays 20+ Year Treasury Bond TLT, which had almost nowhere to go but down after U.S. long-term Treasury yields hit incredible lows in December 2008. Of course, this fund provided one of the only safe havens in 2008, so it's hardly toxic. It should just remind investors that duration risk is a major factor in fixed-income investments. Just because you have your money in bonds doesn't mean you are safe from hefty losses.

The fall of long-dated U.S. bonds caused a loss of less than $450 million of ETF investors' money--peanuts compared with the approximately $1.5 billion in wealth thrown into the black hole of contango known as United States Natural Gas UNG. This fund had a good story, as new shale gas production came online in the U.S. in 2008 while falling energy consumption and a mild winter combined to push gas prices down to incredible lows. However, the trade was far too crowded, so the futures prices kept staying higher than the spot and this fund was forced to buy high and sell low each month. Even as spot prices on natural gas ended up even for the year, this fund lost 57% due to the effects of rolling the futures contracts each month.

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