The Future of ETFs and ETFs of the Future

As they like to say in the business, "Past performance is no guarantee of future results." In 2006, though, it's hard not to be swept away by the opportunities on the exchange traded funds market. The longer-winded caveat appearing on investment websites, advertisements and publicity material is sober wisdom to remember, but ETFs will probably continue to be worth the low risk in the near future. ETFs have been the single hottest trend in the stock market for three years and show no sign of slowing.

Indeed, the ETF market is still moving at such speeds and with new schemes offered literally almost daily, today's innovations will most likely become old news tomorrow. Commodity ETFs and currency ETFs, to cite two examples, were unthinkable three years ago. Thirty of these funds have been trading at 1,000,000 shares daily for three months and have become commonplace in investor parlance.

What can be surmised from today's market buzz? Firstly, a myriad of advisors are sounding the all-clear on past alarms regarding ETF investment as a retirement investment. The problem with small investment in ETFs is broker commissions. However, continued investor confidence in making ETFs a part of retirement 401(k) plans opens the market to investors of all sizes and interests.

In 2006, the hype in ETFs is on commodities. Gold, the first resource commodified for ETF, has inspired the proposal and/or release of products such as copper, zinc, oil and silver. Barclays' iShares Silver Trust is about to join that firm's long and successful list of iShare ETFs. Ameristock Funds and Macro Securities Depositor LLC are planning oil commodity ETF launches, with Macro Securities actually releasing two simultaneously. And the Petroleum Fund of Norway and California-based retirement fund powerhouse Calpers have moved into the farm goods sphere.

With commodity funds managed by Deutsche Bank, Dow Jones-AIG, and Goldman Sachs, the commodity ETF market now boasts $80 billion in assets. Some predict commodity funds will multiply many times over in 2006 alone; if so, the future for commodity funds appears prosperous, although fears that this bubble must burst soon are extant.

This market needn't stop at metals, either. As the Euro becomes more widespread, greater attention is drawn to investments in the currency. Rydex Investments plans the Rydex Euro Currency Trust, an ETF based on the Euro and the first currency-based ETF of any sort. Though unlikely to inspire many ETFs tied in with any other currency, future investment strategies based on the Euro will be.

The new iShares Austria fund is designed to take advantage of the influence Austrian banks exert over the Central and Eastern European region. Despite the boom going on in Central and European countries, salaries lag behind for the nonce. Economic growth will continue in the short term in Central and Eastern Europe, thanks to inexpensive manufacturing costs, cheaper labor (Slovakia, poorest of the new member states, offers salaries ten percent that of Germany's) and lots of construction projects. While the wave of progress continues to wash over the region, an Austrian-based ETF is a decent idea.

The biotechnology industry should boom soon, regardless of the amount of stem cell research allowed in America. The exchange traded fund known as the iShares Nasdaq Biotechnology ETF is composed of companies in pharmaceutical research and development with biological material. The biotechnology sector has generally been taking losses for some time, but these losses are on a steady decrease. This ETF is rather undiversified at present; Amgen makes up a whopping one-sixth of the ETF's holdings, and most companies within the ETF are small sized and even startups. On the plus side, biotech companies are made household names - and thus lots of return for investors - with a single drug brought to market.

Nations such as Germany, Holland and the Scandinavian four have seen alternative energy sources carve a noticeable if small niche in their investment markets. Naturally, ETFs would follow; green energy sources are a definite fruitful source of ETF investment in the future. Noteworthy for 2006 is the PowerShares WilderHill Clean Energy ETF. Including fuel-cell makers Plug Power, Inc. and Capstone Turbine Corporation in the fund, the PowerShares ETF has had an asset increase from US $190 million to US $400 million in three months and trading of the ETF has doubled in a half-year.

Meanwhile, the Coolcat ETF & Fidelity Select Report has, by at least one account, "taken the ETF world by storm." Its performance for fiscal year 2005 was exemplary; Coolcat deserves and gets high praise for its innovative strategies. At an almost 40% return for the year, the Coolcat ETF Portfolio outperformed its closest competitor by over 12%. The Coolcat ETF Portfolio is distinctive in its range of investment opportunity, including international ETFs such as the iShares Brazil Index Fund, the iShares Mexico Index Fund, the South Africa Index Fund and the iShares Emerging Markets Index Fund.

Alongside these international interests in the portfolio sit the S&P 500 Energy Sector (up eighty-six percent since Coolcat acquisition of shares), iShares Dow Jones Transportation Average IYT, PowerShares Dynamic Semiconductors and alternative energy fund PowerShares WilderHill Clean Energy fund (see above). Further, Coolcat boasts interests in the gold commodity ETF market.

Coolcat's success implies that stock market-like playing is possible and advantageous in the ETF market; their heavy emphasis on foreign ETFs is surely temporary, for it is grounded in figures that say ten of the top sixteen ETFs over the past six months have been foreign-based. Common wisdom has it that such aggressiveness should probably be tempered, however, by smaller investors in anything beyond the short term.

Given the recent track record shown by exchange-traded funds, being swept away is easy. Just be sure not to be carried away.