Expect More Innovation in ETFs in 2011

Emerging markets and fixed income are two areas that are particularly fertile ground for useful new products in the ETP space

Ben Johnson 26 January, 2011 | 12:34PM
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Looking further forward into the New Year, one thing that investors can know for sure is that 2011 will witness ongoing innovation within the market for exchange traded products (ETPs). While there will undoubtedly be ETPs brought to market covering new territory across all asset classes, there are two areas that are particularly fertile ground for useful new products: emerging markets and fixed income.

ETPs tracking traditional emerging markets benchmarks, most notably the MSCI Emerging Markets index, were tremendously successful in attracting new investor capital in 2010. (Read more in Could the Flood into GEMs Submerge Investors?) As the developing world crawls out of recession, emerging economies have sprinted ahead. But GDP growth does not necessarily translate into equity market appreciation. While it may seem counterintuitive that a nation's stock market may not benefit when GDP growth is strong, historical evidence points to a weak correlation between the two factors.

In a study of the link between economic expansion and the health of equity markets, University of Florida finance professor Jay Ritter compared the market returns and GDP growth of 32 countries from 1970 to 2002, and concluded that there was little correlation between the two variables. For example, the Swedish equity market posted average annual returns of greater than 8% during the period in question, while the Nordic nation's GDP compounded at less than a 2% annual rate. And the opposite is equally true; strong GDP growth doesn't guarantee strong equity returns. South Korean GDP grew more than 5% per year from 1988 to 2002, while its stock market registered annualised returns of just 0.4%.

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Ben Johnson

Ben Johnson  is director of passive funds research at Morningstar.