Financial markets have been choppy and sentiment has swung wildly in 2016 so far. Big issues that have had an effect on markets include the uncertainty surrounding the Federal Reserve’s interest rate decisions, a challenging domestic environment in China, the Brexit vote, negative interest rates in countries such as Japan, Switzerland, and Sweden, and geopolitical instability in Turkey, Europe, and Latin America.
As we face more uncertainty in the global markets, ETF Database will have the opportunity to sit down with a variety of ETF strategists, experts, and luminaries from September 7th through September 9th to discuss their outlook for 2016 and beyond and get their opinions on ETF strategies, investing ideas, and regulations surrounding the ETF landscape.
We believe that the following three investing themes are most likely going to be discussed throughout the 2016 Morningstar ETF Conference:
1. The Rise and Rise of Smart Beta ETFs
Smart Beta ETFs have taken the entire ETF industry by storm, and it is difficult to escape the commentary surrounding them.
A Smart Beta ETF is a series of twists to the plain-vanilla, market cap weighted index, and is any ETF that purposely deviates from “market return” and tilts the portfolio toward some factor or strategy that has a proven historical record of outperforming or managing risk such as dividends, value, low volatility, momentum, and small caps. Smart Beta, in short, shares attributes with both actively and passively managed funds.
Interest in Smart Beta ETFs has skyrocketed over the past five years; there are now more than 500 Smart Beta ETFs with over $510 billion in assets under management.
Given the limited track record of Smart Beta ETFs, savvy investors should ask themselves a variety of questions before pulling the trigger:
- What type of factor(s) or strategy is the ETF focused on?
- What type of market environments does the fund/strategy outperform or underperform in?
- How is the ETF going to be used in the portfolio, as a core or satellite holding?
- What are the valuations of the underlying securities within the ETF?
- What type of fees does the ETF charge? How liquid is the ETF?
Several discussions and panels at the Morningstar ETF Conference will delve into specific Smart Beta strategies and provide Smart Beta ETF due diligence checklists for investors. For instance, “Low Volatility Strategies: Less Risk, More Reward?” will discuss the relationship between risk and reward and highlight if there is any evidence that these low-risk strategies have become too richly valued. On the other hand, “Can You Harness Momentum?” will challenge the efficient market hypothesis, discuss why momentum exists, and explore how investors can use it to their advantage. Finally, “Multifactor ETFs Are Multiplying” will cover the rationale behind combining factors and/or rotating factors, and examine the methodologies driving the underlying indexes.
2. Will Emerging Markets Recover?
Global growth will likely remain muted in emerging countries due to China’s economic slowdown, deeper than expected downturns in Brazil and Russia, and continuing commodity headwinds. Another thing for investors to note is that emerging market ETFs can have large negative currency translation effects, unless they are hedged.
There are over 200 international and globally focused ETFs with over $250 billion in assets under management. Emerging market ETFs can be a complex place for investors. Should you invest in international (defined as those that invest outside the United States) or globally focused ETFs? Should you invest in ETFs focused on developed-market companies that have a large emerging markets presence, or in ETFs focused on emerging market companies? Should you invest in single-country ETFs or in ETFs focusing on larger regions within the emerging market space? Throw in the currency-hedged and Smart-Beta options, and you’re faced with dilemma upon dilemma.
The Morningstar ETF Conference session “Will Emerging Markets Re-Emerge?” will debate the questions above and determine whether emerging markets will re-emerge. Furthermore, the session will discuss if emerging markets have a place in a long-term asset allocation and delve into how investors can pick ETFs from this diverse group.
3. Challenges Facing the ETF Industry
There are essentially three major challenges facing the ETF industry, including the evolving regulatory landscape, how technology is shaping the future of advice, and an increasing need for investor education.
Regulations have the power to encourage as well as limit the growth of ETFs. And new regulations could spark further growth if they permit further product innovation or lower distribution barriers, but they could also dampen demand, particularly if new tax rules make ETFs less attractive or convenient. For instance, the SEC is currently concerned about liquidity and trading during highly volatile periods as well as leveraged funds. What the regulators decide will really dictate where the ETF marketplace goes over the next few years. The Morningstar ETF Conference panel “Navigating the Evolving Regulatory Landscape” will investigate the substantial shifts taking place that will likely alter the regulatory landscape, and examine ways in which asset managers, investors, and financial advisors can respond and adapt to these changes.
ETF-based robo-advisor services are slowly but surely cutting out the middlemen when it comes to providing traditional financial advice. Robo-advisors could potentially cause the entire financial industry to shift from its lucrative model of charging a percentage of assets under management to a flat-fee subscription model. The Morningstar ETF Conference session “How Technology Is Shaping the Future of Advice” will discuss technological changes such as robo-advisors and big-data strategies, and explain why investors should see these changes as a huge positive for the industry.
Successful financial planning and investing are much more than conducting thorough qualitative and quantitative research and analysis, developing financial models, and understanding the latest market trends. A large part of investing involves investor behavior and biases, as emotions, mental mistakes, and individual personality traits typically complicate the investment decision-making process. Loss aversion and overconfidence are only two behavioral biases that investors exhibit. The Morningstar ETF Conference session “A Guide to Behavioral Science for Advisors” will assist financial advisors and investors of all types with a deeper understanding of human psychology and how to respond — both emotionally and rationally — to challenging situations such as market downturns.
The Bottom Line
Smart Beta, emerging markets, and the evolving challenges facing the ETF industry are only three themes that have been highlighted above. Surely, given the ever-expanding ETF landscape and fast growing product lineup, more themes will become prevalent to investors in the near future. Join us at ETF Database from September 7th through the 9th as we bring you live coverage of the most important presentations, panels, and insights from the 2016 Morningstar ETF Conference.