It's tough to launch new ETFs and find success. That's been the case for years, and 2014 was no exception.
So what was the winning combination among the latest rookie lineup of ETFs? The answer was often less a matter of marketing savvy or raising eyebrows with a novel concept than a simpler route to raising cash. It was ETFs that had investor assets or at least interest lined up long before launching that did the best.
Overall, it was another great year for ETFs, eclipsing $2 trillion in assets. But good-bye ETFs based on every letter of the alphabet—as Vanguard Group once put it sarcastically in mocking new ETFs—and say hello to time-tested strategies that tested the market anew and found favor.
Five of the top 10 exchange-traded products in 2014 (including exchange-traded notes, or ETNs) were based on existing active manager strategies already popular with financial advisors or high-net-worth investors that were recreated within an ETF wrapper—in some cases, the ETFs were specifically created because existing separate account investors asked for the same strategy in an ETF wrapper.
The No. 1 new ETF of the year, raking in $1.2 billion in assets as of Dec. 22, was the First Trust Dorsey Wright Focus 5 ETF, which is an ETF funds of funds using the technical investing process of Dorsey, Wright & Associates, a firm that has developed a following among advisors and investors over the past few decades.
First Trust, the Dorsey Wright ETF's sponsor, has dozens of ETFs targeting tiny niches of the market—even a smartphone ETF—so if you want to follow an ironic turn in the new ETF asset gathering logic: a good way to get your niche ETFs to be used more is by creating an ETF fund of funds for a well-known Wall Street stock picker, whose job will be to invest in your ETFs. Got that?
The top new ETFs
(Source: ETF.com, based on assets raised as of 12/22/14, includes two exchange-traded notes and one ETF that launched in Dec. 2013)
"What we've seen is greater investor adoption of existing investments," said Todd Rosenbluth, head of ETF research at S&P Capital IQ.
It's a trend that was in place before 2014. Last year, two of the best-selling new ETFs were based on the investing processes of Fisher Investments and Vident Financial. In 2014, both of those companies were again among the top-selling exchange-traded products to hit the market. It's been a "continuation of the theme and a broadening and deepening of it," with ETF companies willing to launch these "bespoke" investments with even lower, if still significant, commitments, said Paul Britt, ETF.com analyst.
The No. 11 new exchange-traded product of the year, Deep Value, is based on an investment process from Tiedemann Wealth Management. And across the 10 ETFs it launched in 2014, based on the existing WBI Investments active management approach, the WBI Shares raised roughly $1 billion in assets.
Read MoreETFs hit $2 trillion in assets
"These ETFs and ETNs have assets on the side waiting to come in, so it's a slightly different ball of wax and harder to say it's 'popular' when created for an existing client base," said Robert Goldsborough, Morningstar analyst. "It's not really new money swarming in. It's harder and harder to have new ideas that break through the market noise," he said.
The continuation of the trend may also help explain why new ETFs have been consistent in the overall level of success. The top 10 ETFs have taken in $4.8 billion in assets so far in 2014, according to ETF.com, versus $5.4 billion last year.
That's not to say these ETFs aren't doing some interesting things.
(They also might be worth a look from any investor interested in ETFs, since one of the biggest reasons to stay out of new ETFs is the typical lack of assets, which raises the risk that the ETF will not be able to accurately replicate its benchmark, as well as the risk the ETF fails and closes down, returning money to investors and causing a taxable event.)
The First Trust Dorsey Wright Focus 5 is an ETF fund of funds that capitalizes on exactly what investors have been looking to capture: the benefits of active management without being truly active, and market momentum.
The Dorsey Wright Focus 5 ETF uses existing First Trust ETFs and changes the portfolio every week based on technical analysis of the market. "Even though it is based on an index, it has a high level of 'activeness' to it," Britt said, referring to the fact that many investors are opting for ETFs that take what is known as a smart beta approach rather than flocking to true active management.
"If I were to critique, it's not cheap [a 95-basis-point expense ratio]," Goldsborough said, but he added, "Right now investors are interested in momentum strategies." Investors and RIAs are believers in this notion of factor investing and using ETFs to do it."
Deep Value, meanwhile, takes what Britt called "more of a private equity approach." In other words, picking stocks based on what they might be worth if the companies were chopped up and sold off—"the juicy targets," Britt said, where enterprise value is greater than current market value. The sum-of-all-parts approach to investing makes sense, given the rise of the activist investor and more companies being targeted for being undervalued. You can take a look at which companies DVP thinks are "juicy targets" right now here. Or for investors with a skeptical bent, take a look at some criticism the breakout ETF received from Barron's. It also has a fairly high expense ratio for an ETF, at 80 basis points.
The rest of the best
In First Trust we trust: First Trust didn't just take top honors with the Dorsey Wright ETF, it took spots No. 2 and No. 3 among all new ETFs (that's excluding ETNs) in 2014, which analysts attributed to its top-notch marketing among advisors, and with the short maturity bond ETF and Eurozone ETF, good timing as well, as investors were shortening up on maturities earlier this year amid QE-end fears. There has also been a lot of betting on Europe—even if it hasn't worked yet—based on Europe's version of QE rising just as the Fed version ends.
"There's the view that U.S. stocks were powered by central bank action and central banks in Europe are late to party but following in the U.S.'s footsteps," Britt said. This ETF aims to pick the best performers from among that broader European rally, if it ever occurs. "I think with Europe, there was the thesis it would be a great place to be," Goldsborough said.
King dollar: Meanwhile, WisdomTree's Bloomberg US Dollar Bullish ETF landed in the top 10 among new ETFs, with the greenback bet being among the best of the year in the markets.
Read MoreETFs minted to court the bullish US dollar
The Eastern wisdom of WisdomTree: iShares raised close to $300 million for its Currency Hedged MSCI Japan ETF, as currency hedging continues to be a very popular theme among ETFs. Who does iShares have to thank? At least partially WisdomTree Investments, which nabbed ETF.com's ETF of the Year Award in 2013 with its Japan Hedged Equity ETF. "Abenomics in full effect here," Britt said, referring to the Japanese's government propping up its economy.
WisdomTreet continues to benefit the most from the hedged equity approach and the central banking bets around the globe: Its existing hedged European equity ETF just reached $5 billion in assets.
Partying on with counterparties: In the aftermath of the financial crisis, the ETN space took a reputation hit—warranted or not—because of counterparty risk associated with the banks underwriting notes around which the ETNs were structured. ETN launches declined in the aftermath of headlines about Lehman Brothers-linked ETNs.
Enough years have passed, and the success of the Fisher Investments-tied ETNs (FBGX and FLGE) shows that the product structure can succeed, especially when that counterparty risk is spread out. Both UBS and Credit Suisse raised a lot in their Fisher enhanced large-cap growth ETNs this year.
"What stands out here and seen before is that spreading of counterparty risk," Britt said, adding, "People who have money are paying attention to this risk, and two banks are better than one."
Speaking of ETNs and Wall Street shenanigans ... :The leverage theme in ETFs has been a big one for years, with inverse/leverage funds from ProShares and similar ETF providers offering traders a way to double, even triple, their biggest bullish or bearish bets.
But one of the more successful new exchange-traded products (actually launched in Dec. 2013) wasn't just an ETN but offered a new twist on leverage and a mouthful of a brand name: the UBS ETRACS Monthly Pay 2X Leverage Closed End Fund ETN.
No, it doesn't rob average Americans of their paychecks and then lever up that income in convoluted structured products, but it is a pretty niche approach to generating what older investors frustrated with bond yields want: more income. The ETRACS ETN pays a variable monthly coupon linked to two times the cash distributions, if any, of its underlying ISE High Income Index—an index that holds 28 income-producing closed-end funds.
"Most of the levered plays are not geared toward income," Britt said. The successful ones have been more commonly linked to commodities and currencies.