The ETF industry has rapidly evolved over the past nine years. There were roughly 750 ETFs in 2008; currently, there are nearly 2,000 ETFs competing for more than $2 trillion in assets under management in the U.S.
In terms of size and growth, very few asset classes compare to exchange-traded funds. In the span of about 12 years, the ETF industry has grown from a paltry $417 billion to $4.4 trillion. Inherent advantages such as flexibility, portfolio diversification and lower costs have made ETFs a modern-day staple of investors’ portfolios.
Projections of assets under management show the ETF industry isn’t finished growing just yet. According to Ernst & Young, more than $7.6 trillion will be held in ETFs by 2020.
We have gained valuable insights on the evolution of the industry during our time at the 2018 Inside ETFs Conference. From the perspective of investors, five core themes stood out as particularly relevant given the current economic and financial climate.
Read Insights from the Inside ETFs Conference: Advisor Edition to find out more.
1. Smart Beta in Fixed Income
Smart beta strategies have proliferated in recent years, as investors aim to go beyond traditional index construction methodologies tied to market capitalization. However, if there is one area that smart beta has not grown, it’s fixed income. Until now, smart beta has largely been applied to equities, with fixed income assets much less likely to adopt this approach.
As one might expect, there are several constraints limiting the adoption of smart beta methodologies within the fixed income space. These include liquidity constraints, a lack of historical data, higher transaction costs and increased complexity. That being said, the future will likely see greater adoption of smart beta strategies within the fixed income market. To explore the reasons why, read: Why Smart Beta Has Not Proliferated in the Fixed Income Space.
2. Opportunities in Europe
Europe emerged as one of the surprise economic stories of 2017, which gave investors more reason to be bullish about the region’s future. Stronger than expected growth, falling unemployment and the return of political stability have all helped the Eurozone 19 regain momentum. The regional economy is expanding so favorably that the European Central Bank (ECB) has already announced a gradual reduction in bond purchases, a trend that is expected to continue for the foreseeable future.
Fund investors are therefore increasing their exposure to the Eurozone economy. The performance of European equities, not to mention the euro, have demonstrated the growing potential of investing in the regional market. Moving forward, the European rebound will continue to offer investors solid growth prospects.
For a list of top European ETFs, click here.
3. ESG Investing
It has been said that roughly one-quarter of professionally managed money worldwide is tied to environmental, social and governmental strategies (ESG). Although this figure is subject to a lot of debate and scrutiny, the wave of the future is clearly aimed toward ESG strategies. It’s not difficult to see why: businesses and governments are under growing pressure to address what many perceive to be social and environmental injustices.
Of course, this debate has also impacted the ETF market, with a growing share of investors exploring funds that address concerns related to climate change, executive compensation and social responsibility. However, the problem with these strategies is there is no generally agreed-upon definition of what actually constitutes an ESG strategy.
ETFdb.com has a detailed discussion of the benefits and drawbacks associated with ESG. Click here to learn more.
4. Alternative Income Strategies
In their quest for higher returns, investors are increasingly shifting their focus to alternative income strategies. In other words, they are cycling into other asset classes in pursuit of higher income. These include dividend-focused funds, REITs, defensive sectors and even private equity alternatives.
Alternative income strategies are likely to proliferate in the next few years as investors look to hedge against market risks. With the bull market now in its ninth year, some investors are growing weary of valuation risks. Dividend strategies will continue to prove their worth in this environment, with funds that provide higher yields likely to see greater demand.
For the best dividend plays, check out the Top 100 Highest Dividend Yield ETFs.
5. Using ETFs for Strategic Asset Allocation and Tactical Asset Allocation
Optimal asset allocation strategies are always top of mind for investors, and this is unlikely to change anytime soon. In the current investment climate, two strategies are of particular importance: strategic asset allocation and tactical asset allocation.
Strategic asset allocation is an investment strategy that involves setting target allocations for different asset classes, which are then rebalanced periodically. Given their flexibility and ease of access, ETFs are especially useful when it comes to rebalancing. A variety of ETFs can accomplish this task, including broad U.S. stock market funds, bond market funds and international equity funds. Some of the most prominent examples are iShares Growth Core Growth Allocation ETF (AOR ) and First Trust Multi-Asset Diversified Income Index Fund (MDIV ).
Tactical asset allocation, on the other hand, actively adjusts an investment portfolio’s allocation with the aim of improving risk-adjusted returns. Some of the most well known tactical ETF assets include the JPMorgan Diversified Alternatives ETF (JPHF ) and the AdvisorShares Meidell Tactical Advantage ETF (MATH ).
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