Wednesday, April 12, 2006

The missing funds of the future

Matthew Hougan posted an article on IndexUniverse.com compiling reader suggestions for exchange traded funds. The main idea is that investors want international exposure, especially to small cap, as well as one-shot balanced allocation ETF's.

The WisdomTree international small cap dividend ETF will be the first international small cap fund traded. I think it's a telling sign of the innovation in the dividend ETF world that more than three years after international iShares began trading there are still no international small cap ETFs from any of the traditional sponsors. As I've mentioned before, I think getting foreign currency dividends are defensive investment against the impending decline of the US Dollar. Powershares (PID) fund has become very popular for investors seeking diversification with quality assurance.

I think that next generation of ETF's will mostly consist of quality screened indexes. The proposed First Trust Recently Deutsche Bank Strategic Value ETF is the kind of index fund that will be more common in the future. There is a precedent in the Powershares Zacks Small Cap/Microcap funds and dynamic market portfolios for screened indexes. Dividend funds could also be thought of as having a built in quality screen.

Although there are currently three REIT ETFs (IYR) (ICF) (VNQ), all of them focus on equity real estate investment trusts that own real property. A combined Mortgage REIT/Business Development Company ETF would make a nice complement to equity REITs, as well paying out generous dividends to income investors. It is unclear if the proposed streetTRACKS KBW Mortgage Finance ETF will include REITs or be limited to mortgage banks and related industries.

Balanced ETFs will probably the death the mutual fund industry. My conservative income portfolio would make a fine one-stop ETF for people seeking a single investment for retirement. Portfolio ETFs would save on brokerage fee's because investors would only have to trade a single stock, and not pay for rebalancing. I am surprised that Barclay's has not cobbled together pools of iShares into to "Portfolio ETFs".

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