7 ETF Innovations To Be Thankful For
Michael Johnston: Innovation has become standard in the ETF industry over the past several years, as a wide range of issuers have launched new and exciting products and pushed the envelope in their efforts to deliver a superior investing vehicle. As those investors in the U.S. celebrate Thanksgiving, we highlight seven innovations for which we’re particularly grateful [for the more ETF news and analysis subscribe to our free newsletter]:
1. Commission Free Trading
The fact that hundreds of ETFs can be traded commission free is often overlooked, but it isn’t lost on the countless investors who take advantage of the ability to move in and out of positions for free.
A handful of platforms offer commission free ETF trading programs, covering more than 200 products in just about every asset class. TD Ameritrade alone boasts more than 100 ETFs on its commission free platform, while the entire lineup of Vanguard and Schwab ETFs can be traded at no cost on those platforms [see Free ETF Trading: Comparing All The Options].
This is a relatively new innovation–all of these platforms have popped up in the last three years or so–but one for which cost conscious investors give hearty thanks.
2. Rock Bottom Expense Ratios
We couldn’t highlight the innovation in the ETF industry without mentioning the ongoing downward pressure on management fees that has become common in the past few years. Expense ratios continue to drop, with Vanguard, iShares, Schwab, and several other firms announcing in recent months that they would reduce already low management fees on many of their popular products.
This isn’t rocket science, but the recognition that ETF investors love low costs and subsequent response certainly qualifies as an innovation. And given the direct impact on bottom line returns realized by investors, it’s hard not to be thankful for the cost competition in the industry [see also The Top 10 Cheapest And Most Expensive ETFs].
3. International Bond ETFs
Fixed income ETFs are nothing new — they’ve been around for the past decade — but issuers have only recently offered up products that allow targeted access to international bond markets. For investors who see benefit in maintaining a diversified bond portfolio, that’s a welcome development; it’s now easy (and cheap) to invest in debt issued by governments and companies in China, India, and dozens of other countries around the globe.
Emerging market debt has become popular with investors looking to boost their current returns; focusing on the developing world can provide a significant jump in expected yield. Other ETF opportunities in the international bond markets include:
- Japan Bonds
- Canada Bonds
- Italian Bonds
- German Bonds
- Australian Bonds
4. Creative High Yield ETFs
With interest rates basically glued to record lows, it’s tough to achieve meaningful current returns. Gone are the days when Treasuries would yield you 5% and high quality corporates would sport yields close to double digits; welcome to the era of negative real returns.
Fortunately, there are a number of ETFs that offer exposure to high yielding asset classes–including some non-traditional destinations. Whether it’s mortgage REITs, MLPs, Business Development Companies, or strategies such as the Dogs of the S&P 500, there are a number of exchange-traded products that are producing impressive yield opportunities in a challenging environment [see Dividend ETF Special: 25 Equity ETFs With Attractive Distribution Yields].
5. Factor ETFs For Every Viewpoint
In addition to opening up brand new asset classes (as highlighted in the two points above), ETFs have allowed investors to slice-and-dice more traditional corners of the investable universe to which they’ve had access for decades. Factor investing is nothing new, but it’s only recently been packaged in the exchange-traded wrapper in a way that allows investors to implement rules-based strategies in a low cost and low maintenance manner.
There are a number of factor-based ETFs that allow investors to express a specific viewpoint or establish a specific tilt:
- High Beta
- High Momentum
- Low Valuation
- Low Volatility
- Wide Moat
6. Safe Havens
In these turbulent times, cautious investors can be thankful that there are a number of options for lowering volatility and preserving capital. Just as there are a number of ETFs that allow investors to put maximum skin in the game and aggressively pursue the upside, there are several funds that can be used to scale back risk to varying degrees. Some of the ETFs below are simply focusing on low volatility stocks (for those who want to maintain full equity exposure) while others are closer to putting money under the mattress [see 5 ETF Strategies To Reign In Risk].
- Money Market ETFs
- Low Volatility ETFs
- Mega Cap ETFs
- Floating Rate Bond ETFs
- Pre-Refunded Municipal Bonds
- AAA Corporates
7. Free ETF Tools
With more than 1,400 ETFs out there, many of which offer substantially similar exposure, finding the one that’s right for your return objectives and risk tolerance can be a daunting task. Fortunately, there’s a suite of free ETF tools available to help investors of all walks navigate the increasingly crowded waters:
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