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Our 5 Favorite ETFs Launched in the Past 6 Months

Some new funds may help protect against the long-term effects of quantitative easing. Others offer access to low-cost baskets of emerging-markets stocks and high-dividend-paying companies.

Robert Goldsborough, 03/06/2013

In an ETF Specialist article last June, we published a list of Morningstar's five favorite exchange-traded funds that had been launched in the previous year.

At that time, issuers had launched a slew of exchange-traded products--more than 240 in total--over the previous 12 months. With such a bevy of new products available to investors, we sifted through those launches to come up with five ETFs that to our way of thinking represented the best in innovation, were good uses of the ETF vehicle, offered relatively inexpensive price tags (or in some cases, were downright cheap), and were reasonably distinctive.

Since that time, things have changed in the ETF world. For one, the pace of new launches has slowed down considerably--in the past six months, just 54 exchange-traded products have launched. That implies an annual run rate of just over 100 launches, or less than half of the ETF industry's product-launch rate during 2011 and the first part of 2012. What's more, the number of liquidations of exchange-traded products has stepped up significantly. This environment suggests that issuers have become less interested in throwing anything at the wall to see what sticks. They strike us as being more likely to be thoughtful and judicious about the launches behind which they will allocate resources and less willing to prop up money-losing products.

Even in a reduced-launch environment, however, some interesting new ETFs have launched recently that we think are worthy of investors' consideration. Below we highlight five new offerings from the past six months that offer investors something new--either access to a useful strategy or a new low for an expense ratio. What's more, these all are funds we feel comfortable recommending to investors.

Easing Any Pain From Quantitative Easing: TIPS, Foreign Currency, and Bank-Loan ETFs
In the United States, quantitative easing is continuing, and the Federal Reserve has signaled its desire to keep interest rates low for the next year or two. No one knows whether quantitative easing will result in higher inflation, higher interest rates, and the debasement of the U.S. dollar, but many investors are concerned about these potential outcomes.

Shorter-duration Treasury Inflation-Protected Securities ETFs are less exposed to interest-rate risk, relative to longer-duration TIPS funds, and tend to be more strongly correlated with inflation than long-term TIPS, according to recent research from PIMCO. One new launch in the past few months, Vanguard Short-Term Inflation Protected Securities Index ETF VTIP, offers much to like, with both its average maturity and its average duration clocking in at 2.6 years. VTIP's 0.10% price tag is especially appealing, as it's just half the cost of several large and liquid ETF competitors.

With most investors' portfolios dominated by fixed-rate bonds that face price risk from rising interest rates, investors may want to consider diversifying their bond portfolios with floating-rate securities. One corner of the floating-rate market that has attracted interest from ETF investors is the area of bank loans. Also known as senior loans or leveraged loans, these variable-rate, senior secured debt securities are issued by highly leveraged companies. As such, this asset class is suitable for investors comfortable with the risks associated with below-investment-grade bonds. However, a basket of bank-loan securities in an ETF or mutual fund can offer decent yields for income-hungry investors. What's more, in a rising-rate environment, bank loans tend to outperform fixed-rate securities. An interesting recent launch in this space is Highland/iBoxx Senior Loan ETF SNLN. It's the ETF marketplace's second passively managed fund devoted to bank loans, after  PowerShares Senior Loan Portfolio BKLN, which launched in March 2011 and has drawn significant inflows. Both the Highland ETF and BKLN are structured very similarly, tracking rules-based indexes of large, liquid leveraged loans. However, SNLN is cheaper at 0.55%, compared with BKLN's 0.66%. Our only area of concern with this fund relates to the general illiquidity of bank loans.

For investors concerned about the long-term outlook for the U.S. dollar, a recently launched ETF that we like is PIMCO Foreign Currency Strategy ETF FORX. The only actively managed currency ETF holding multiple currencies, FORX holds currencies expected to appreciate relative to the dollar, along with local currency bonds. This fund's appeal comes from its diversification and the fact that it can benefit from the best of PIMCO managers' collective wisdom on where currencies are headed. A caveat: investors should always be mindful of currency investments' dismal long-term expected returns (effectively zero after adjusting for interest-rate differences), the dollar's general role as a safe haven during crises, and the fact that faster-growing foreign countries' currencies don't always appreciate relative to the dollar. However, by the same token, there's clear proof that some active managers can generate positive long-term returns by investing in currencies. In the mutual fund space, Franklin Templeton Hard Currency ICPHX is a great example of a currency fund that has taken advantage of the dollar's decline over the past 10 years and generated positive long-term returns. FORX, whose 0.65% price tag is far below the Templeton mutual fund's 1.06% expense ratio, will follow a similar strategy at a reduced cost.

Robert Goldsborough is an ETF Analyst at Morningstar.
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