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The Thrill of the Chase: Five ETF Races to Watch

Photograph by Robert Daly/Getty Images Close

Photograph by Robert Daly/Getty Images

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Photograph by Robert Daly/Getty Images

As we head into the home stretch of 2013, several exciting ETF races are in progress. The questions swirling around some of the market's leading exchange-traded funds: Which one will fall from its perch as the largest of its peers? Which will be the champion of cash inflows for the year? Will one of the biggest, most badly battered exchange-traded funds come back to life by yearend? Here's your ETF racing form.

1. The Battle to Be Bond King

For the first time in the history of exchange-traded funds, the largest bond ETF doesn't belong to iShares. The $16.9 billion Vanguard Total Bond Market ETF (BND) has surpassed the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), which has $16.5 billon in assets. BND didn’t snatch the crown as much as it was lost by LQD, which saw $10 billion flow out this year as investors fearful of rising rates fled funds holding longer-dated bonds. BND itself has lost $1 billion in assets this year -- but that’s $9 billion less than LQD.

BND has slightly less interest rate risk than LQD, and Vanguard Group’s products give wide exposure at rock-bottom prices. BND offers exposure to 16,000 government and corporate bonds for a 0.10 percent expense ratio, or $10 for every $10,000 invested. LQD has a 0.15 percent expense ratio and provides exposure to 1,100 bonds. Vanguard is becoming the Wal-Mart of exchange-traded funds, taking in 35 cents on every new dollar invested in U.S. ETFs. At this rate it could pass State Street Corp. (STT) in ETF assets sometime next year to take the No. 2 spot in ETF assets under management after BlackRock Inc. (BLK).

2. The Bottom-Fishing Bet

The Market Vectors Gold Miners ETF (GDX) should be nicknamed the Paradox for its posting of lousy returns while attracting lots of new money. GDX closed at $23.05 on Oct. 11 -- the third-lowest price in its history and its second-lowest price in five years. On that same day a continued influx of money led the ETF to a record high of 299 million shares outstanding, the 14th-highest among all ETFs.

Some of those shares outstanding could have been bought by market-makers to lend to investors that want to short GDX, but much of it is likely investors trying to call a bottom. GDX has underperformed virtually everything this year, losing 42 percent, and has been spinning out of control for over two years. Gold miners have struggled for reasons including a drop in gold's price, subdued inflation expectations and worse-than-expected miner profitability, according to Bloomberg Industries.

Any speculator that calls the bottom correctly could make a killing, but no one has pulled it off yet. That said, since Oct. 11, GDX is up 14 percent.

3. The Fight for the Cash Crown

The Vanguard FTSE Europe ETF (VGK) is leading the charge into European ETFs, which have seen assets increase 65 percent since mid-July, thanks to better economic numbers out of Europe and increased investor confidence. VGK is dominating the year's second half, sucking in cash like a giant vacuum cleaner. Since mid-July it has pulled in just under $5 billion of new cash, the second-largest amount going into any ETF during that time. It returned 14 percent during that stretch, while the S&P 500 has gained 5 percent.

If inflows into VGK stay strong, we could see an exciting race in the competition for the most inflows of 2013. The current leader is the WisdomTree Japan Hedged Equity ETF (DXJ), which attracted $8.7 billion in new money this year; VGK's year-to-date tally is $5.3 billion. DXJ has pulled in about $600 million since June, so its inflows may have topped out. We could see a tight race between an ETF that tracks Japan and one that tracks Europe, which would have been inconceivable 18 months ago.

4. A Solar-Powered Sprint

The Guggenheim Solar ETF (TAN) is having one of the most memorable runs of any ETF ever, with a year-to-date return of 141 percent. It’s one thing to outpace all the other nonleveraged ETFs, but TAN is now beating all the leveraged and inverse ETFs too -- such as ProShares Ultra Nasdaq Biotechnology (BIB), up 128 percent, and Direxion Daily Healthcare Bull 3x, (CURE) up 126 percent.

We covered TAN back in May when it was up 41 percent. Even that gain was a bit of a shock given the ETF's earlier near-death experience. Until the end of last year, TAN'S return since inception was -91 percent. Everyone thought its initial run was a prolonged dead-cat bounce, but TAN’s consistency has silenced the skeptics. We'll see if that continues.

5. Recovery From a Muni Mawling

Worries over rising interest rates have whacked the largest muni bond fund in the world. The iShares National AMT-Free Municipal Bond ETF (MUB) has been bleeding assets and trading at a discount to its net asset value since May. Since then, it has been on a bleak trip down the abyss.

MUB saw its first sign of life last week. That's when it had its first inflows since May, with a respectable $50 million. And it didn't close at a discount on Oct. 24 -- the first time in five months that the price wasn't below the net asset value. These signs could signal a turnaround in this ETF and in the municipal bond market in general.

A period of prolonged low rates, which seems more likely after the economic hit from the government's partial shutdown, would make MUB more attractive as an income play. It yields about 3 percent for a tax-equivalent yield of about 5 percent. This, and the beating MUB has taken, could give investors an opportunity to get back into the fund at a good price. Stay tuned.

Eric Balchunas is an exchange-traded-fund analyst at Bloomberg. More ETF data is available here, and weekly ETF podcasts can be found here.

Previous ETF stories by Eric Balchunas:

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