The ETF industry has rapidly evolved over the past eight years. There were roughly 750 ETFs in 2008; currently, there are more than 1,900 ETFs competing for over $2 trillion in assets under management in the U.S.
ETF usage has grown in popularity among investors in recent years. Among the main reasons for the success and popularity of ETFs are their low costs, transparency, tax efficiency and versatility. These attributes provide an opportunity for financial advisors and individual investors to access investment options on par with the quality often only available to institutional investors. In addition, institutional investors can utilize ETFs because ETFs provide greater flexibility in their portfolio construction.
We have gained valuable insight on various ETF themes, trends and investment strategies during our time at the 2017 Inside ETFs Conference.
Today, we dive into a few important insights for investors. Yesterday, we discussed insights for advisors from the Inside ETFs Conference. Read Insights from the Inside ETFs Conference: Advisor Edition to find out more.
1. Rise of the Responsible Investor
ETFs have recently seen a significant increase in adoption by asset managers in recent years. Currently, more than $8 trillion in assets under management in the U.S. are devoted to ESG strategies, according to data from The Forum for Sustainable and Responsible Investment. Sustainable investing has grown at a compounded rate of 34% each year since 2014.
Environmental, social and governance investing (ESG) involves integrating environmental, social and governance factors into fundamental investment analysis and the portfolio construction process. There is growing evidence that ESG investing may offer investors strong long-term risk-adjusted returns. ESG ETFs are coming into the ETF marketplace as investors are continuously demanding these types of investments now.
Several ETF issuers, such as Blackrock and State Street, have ESG ETFs of their own.
TIAA Global Asset Management (TGAM) – which owns Nuveen – launched its lineup of ESG ETFs in December 2016.
For more information, read This Week’s ETF Launches: Nuveen Makes a Big Splash.
For a full list of Socially Responsible ETFs, click here.
In essence, there are three types of screening methods in the ESG space. The first are negative screens, which focus on excluding factors (eg. excluding tobacco companies). The second are positive screens, which focus on inclusion. The final one is that of shareholder engagement, whereby fund managers and investors attempt to influence their holdings via direct dialogue and/or shareholder voting.
To find out more about ESG investing, read Socially Responsible Investing (SRI) – Better Returns for Being “Good”.
2. Smart Beta Continues to Evolve
The smart beta ETF space has continued to expand and has seen innovation in recent years. Smart beta ETFs typically use either single-factor or multi-factor approaches. More and more investors are utilizing smart beta ETFs for their portfolio management needs. Read Smart Beta: Single Factor vs. Multi-Factor Approaches to understand the two different approaches to smart beta investing.
The factors to consider in smart beta investing include the following:
- Volatility
- Momentum
- Small cap
- Value
- Dividend yield
- Quality
- Credit
- Term
Read Smart Beta ETFs Can Help You Navigate The Market Cycle to find out more.
Two of the biggest opportunities within the smart beta space currently are in fixed-income and liquid alternatives. 2017 will likely be the year where the smart beta space continues to mature and more products proliferate the fixed-income space. Investors want more fixed-income ETF products that help them plug holes in their portfolios, manage duration risk, control overall risk and add liquidity to their portfolios.
Even though there have been a large number of smart beta ETF launches in recent years, investors are shunning ETFs that don’t provide added value.
3. Managing Your Portfolio Through Geopolitical Risks in 2017
Geopolitical risk is one of the biggest concerns for investors currently.
Brexit. Trump. Italy post-referendum. Rising populism around Europe. Upcoming elections in Germany and France. China vs. United States currency and trade wars.
The world is fraught with potential geopolitical events in 2017. Understanding how to navigate such an uncertain financial landscape is crucial to your portfolio returns.
To find out more about ETFs exposed to particular countries, use ETFdb.com’s ETF Country Exposure tool. Select a particular country from the world map and get a list of all ETFs with exposure to that country.
The biggest concern for investors when it comes to geopolitical risks is uncertainty. Uncertainty negatively impacts investor sentiment. Investors cannot easily quantify how it will affect their portfolios. Brexit was arguably the biggest geopolitical risk of 2016 because it created uncertainties about UK-EU trade relations and the future of the single market itself.
For a full list of potential geopolitical events in 2017, read Actively Navigating Geopolitical Risks and find out how you can navigate these risks using ETFs.
4. Investing in Emerging Markets Amid a Rising U.S. Dollar
Emerging markets provide investors with opportunities due to higher growth rates, higher expected returns and diversification benefits. On the flipside, emerging markets have additional risks including poor governance, foreign exchange risk, political risk and illiquid investments.
Even though emerging market investing has its advantages, as the U.S. Federal Reserve starts raising interest rates the impact of this decision may hit emerging markets hard. Firstly, as interest rates rise in the United States, capital inflows into the U.S. increase. This means that fund outflows from emerging markets increase as well. This is a double whammy as most emerging markets are heavily reliant on foreign inflows to fund their fiscal programs. Secondly, emerging market countries have a significant amount of U.S. dollar-denominated debt. Local currency devaluations due to capital flow out of emerging markets may make servicing this dollar-denominated debt more challenging, not just for the country, but also for businesses within the country that borrow in U.S. dollars.
For a full list of emerging market ETFs, click here.
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