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ETF Specialist

ETF Year in Review 2011

The best and worst of this year's new ETFs, escaping the ivory tower, and active ETFs keep on growing.

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The market took a beating this year, but exchange-traded funds themselves had a banner year despite some snags. Three global regulators--the Financial Stability Board, the International Monetary Fund, and the Bank of International Settlements--released reports in quick succession warning of the systemic risks created by ETFs. Their concerns spurred a much-needed debate and prodded European ETF sponsors to disclose their risks more transparently. Fortunately, the U.S. ETF market is much more transparent and conservative, so most commentators focused their fire on the alchemical "synthetic" ETFs that European investment banks are so fond of. Despite the headlines, U.S. ETFs gathered an extra $100 billion, handily beating flows to the gigantic U.S. mutual fund market. I thought that, amid this sea change, I'd digest this year's major trends and pull out my crystal ball to peer into the future of the industry.

The Best of This Year's Crop
Sponsors launched more than 300 ETFs this year, boosting the ETF population to just under 1,400. I sifted through them to identify the ETFs that exemplified the qualities that made the industry so popular: market-leading low costs and broad appeal. One clue was asset flows, as I've found that good ideas tend to attract the bulk of assets. The two clear winners were  iShares High Dividend Equity (HDV) and  PowerShares S&P 500 Low Volatility (SPLV), which have more than $800 million each in assets. (Morningstar licenses HDV's index to BlackRock and earns asset-based fees.) Both are low-volatility value funds with reasonable costs. I like both funds a lot and the low-volatility theme in general--in June, I urged investors to seek low-volatility strategies.

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Samuel Lee does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.