The Best and Worst New ETPs of 2018

As of Dec. 19, there were 272 new exchange-traded products (inclusive of exchange-traded funds and exchange-traded notes) launched in the U.S. market in 2018. This placed fourth behind 2017, 2015, and 2011 in terms of the total number of new ETP launches in a calendar year. There are now 2,292 ETPs available to investors. Since

Though there are plenty of choices on the ever-expanding menu, investors' tastes are basic. Of the 2,292 ETPs on offer, the top 100 as measured by assets under management accounted for 71% of the $3.4 trillion invested in ETPs at the middle of December. The top 100 are the Swiss Army knives of the ETP menu. They are efficient multipurpose tools that do a lot of different jobs for a lot of different people.

These figures are all fun fodder for banter among industry watchers, but what do they mean for investors? First, they demonstrate that the best menu options are already out there and have been for some time, right in front of your nose. Second, it means that the odds of something better coming to market continue to grow slimmer with time. It's going to be awfully difficult to beat instant access to the entire U.S. stock market at a cost of 0.03% per year (though Fidelity Zero Total Market Index FZROX managed that feat this year) or the U.S. investment-grade bond universe for 0.04%.

Here, I look at the class of 2018 and call out what we believe were the best and worst new launches of the year.

The Best It's difficult to stand out in this cramped landscape. If anything, standing out can be detrimental, as the traits of successful new entrants are no different than those of existing best-of-breed funds: time-tested strategies, low fees, a solid sponsor, and--ideally--early signs of long-run viability as measured by AUM and flows. We want to have confidence that these funds will be around three, five, and 10 years from now.

Vanguard U.S. Multifactor ETF VFMF Vanguard launched six actively managed factor ETFs in February. Five of them are single-factor funds that attempt to harness minimum volatility, value, momentum, liquidity, and quality in isolation. The sixth is VFMF.

This fund is distinct from other multifactor ETFs in a few ways. First, it is actively managed, but just barely so. The fund's managers employ a paint-by-numbers brand of systematic active management that allows them to balance achieving their desired factor exposures with minimizing the costs involved in trading the portfolio in such a way that wouldn't be possible if they set out to track an index directly. Second, the fund goes further down the market-cap spectrum than most of its multifactor peers, where factor returns have tended to be richer. Furthermore, like close peers

Those interested in learning more about Vanguard's new suite of actively managed factor ETFs should read "Examining Vanguard's Active Factor ETFs" by my colleague Alex Bryan.

iShares ESG U.S. Aggregate Bond ETF EAGG Investors looking to build portfolios with environmental, social, and governance criteria in mind have few options when it comes to the fixed-income portion of their portfolio. Launched in October, EAGG could serve as a suitable core holding for investors seeking to balance their portfolios with their personal values. The fund tracks the Bloomberg Barclays MSCI US Aggregate ESG Focus Index and charges a 0.10% fee. The index builds a portfolio of investment-grade U.S. bonds from issuers that score highly on ESG metrics. An optimization process seeks to ensure that the benchmark will have a risk and return profile that's similar to its parent index, the Bloomberg Barclays U.S. Aggregate Bond Index. Though ESG is not everyone's cup of tea, this new bond fund is a solid option for rounding out an ESG-oriented portfolio.

The Worst There were plenty of suspect new entrants into the ETP space in 2018. A common thread among many of them is that they prey on investors' impulse to chase what's hot. These funds tend to offer narrow and/or overly complex exposures, charge high fees, and have sponsors that prioritize salability over staying power.

Gabelli Pet Parents' NextShares PETZC It is likely that we all know someone who treats their precious pet as a person. PETZC tries to capitalize on our penchant to spend on our four-legged friends. Like many other thematic funds, this one attempts to tap into a narrative that many investors can relate to. Most of these narratives are far better stories than they are investment strategies. Spinning this particular story into a portfolio results in a concentrated portfolio of 30 stocks with a strong small-growth orientation. About two thirds of the fund's assets are invested in healthcare stocks, most of which focus on pet healthcare, including the fund's largest holding PetIQ PETQ--which soaks up nearly 8% of the portfolio. These traits will likely lend themselves to pronounced volatility. Furthermore, the 0.90% price tag causes further indigestion. And all of this assumes that you could invest in this fund even if you wanted to. At present, NextShares are only available to investors in a limited number of channels. All told, in our estimation, this fund is a dog.

Breakwave Dry Bulk Shipping ETF BDRY Unless you own a fleet of dry bulk ships and would like to use this ETF to hedge your exposure to that particular asset, then BDRY probably has no place in your portfolio (and you might be better off just using the associated futures contracts directly). The fund provides investors exposure to the daily change in the price of dry bulk freight futures. Like other funds of this ilk, achieving exposure to an extremely volatile corner of the market via futures contracts comes with a whole host of red flags and disclaimers regarding contango, backwardation, and so on. Investors in this fund shouldn't be surprised if they wind up lost at sea.

[1] The ETF graveyard features headstones for a pair of past years' winners of our "Worst New ETPs" prize--Restaurant ETF BITE and Spirited Funds/ETFMG Whiskey and Spirits ETF WSKY. Also a pair of last year's "Worst," Democratic Policies Fund DEMS and Republican Policies Fund GOP, have since been merged into EventShares U.S. Policy Alpha ETF PLCY.

Disclosure: Morningstar, Inc. licenses indexes to financial institutions as the tracking indexes for investable products, such as exchange-traded funds, sponsored by the financial institution. The license fee for such use is paid by the sponsoring financial institution based mainly on the total assets of the investable product. Please click here for a list of investable products that track or have tracked a Morningstar index. Neither Morningstar, Inc. nor its investment management division markets, sells, or makes any representations regarding the advisability of investing in any investable product that tracks a Morningstar index.