2017 will easily go down as one of the sturdiest on record for exchange-traded funds. Not only were a multitude of new and exciting funds launched, but fresh heights were achieved in global fund flows to these diversified investment vehicles. Through the first eleven months of the year, ETFs have amassed over $400 billion of new assets and have yet to show any signs of slowing down.
Much of this capital has been driven by the obvious benefits that ETFs offer over comparable alternatives. They serve as a way to access markets without the high fees of mutual funds or the business risk of individual stocks. These tools are a low-cost and transparent way to own virtually any asset class or factor dynamic while still retaining full control of your portfolio. They are easy to own, easy to understand, and give investors a tremendous leg up on reaching their long-term goals.
In what has become an annual tradition, I look back at some of the more successful and interesting ETF launches of the year. It’s my hope that this analysis will spark a deeper understanding of emerging products as well as hone your watch list for potential opportunities.
Carving Out Core Exposure
One element that has made juggernauts like Vanguard and BlackRock so successful is their focus on core holdings for every type of investment portfolio. These are often the most highly diversified, lowest cost, and most heavily liquid of all the ETFs currently trading.
A fund that was added to that category this year is the iShares Core MSCI International Developed Markets ETF (IDEV). This relatively new ETF has amassed an impressive $881 million since its March 2017 debut in a red-hot market for international stocks.
IDEV owns over 1,200 equity securities of developed foreign nations and charges a miniscule expense ratio of 0.07%. It meets all the criteria for a highly sought-after core holding and will likely continue to gather additional assets if the trend of international stocks remains strong.
I also want to give a shout out to the core-focused Schwab 1000 Index ETF (SCHK), which debuted in October and has already accumulated nearly $200 million in assets. Owning 1,000 U.S. stocks for just 0.05% annually makes for an easy-to-understand fund with an attractive cost structure.
You’re going to be hearing a lot more about multi-factor ETFs in the coming years as a potential bridge between passive indexes and true active management. The basis behind this strategy is to score and rank a universe of stocks based on numerous criteria such as quality, value, momentum or volatility. The index will then continually evaluate and rebalance its holdings based on the changing landscape of stock fundamentals and performance. This certainly falls into the “enhanced index” or “smart beta” category as a rules-based methodology that updates more frequently than conventional benchmarks.
That is the idea behind the Principal U.S. Mega-Cap Multi-Factor Index ETF (USMC), which debuted in October and has been seeded with over $500 million of investor capital. USMC charges an extremely reasonable 0.12% expense ratio and is geared towards identifying a narrow universe of mega-cap stocks like Apple Inc (AAPL) and Pepsi Co (PEP) with a tilt towards companies demonstrating lower volatility than their peers.
It’s also worth noting that numerous other multi-factor stock ETFs have been launched from PIMCO, PowerShares, and BlackRock this year as well. Investors will have a multitude of choices when opting to evaluate this group and should closely examine the intent of each strategy before deciding to invest.
It may not seem like the type of market to worry about risk right now, but that will ultimately change on the other side of this uptrend. Numerous ETF issuers are focused on managing risk by strategically adjusting the underlying holdings or adding various hedges to mitigate downside pressures.
The DeltaShares S&P 500 Managed Risk ETF (DMRL) is one example of this category that launched in late July. DMRL is based on an index that shifts allocations between the S&P 500, Treasury bonds, and cash according to various risk measures. The goal is to reduce overall volatility through a multi-asset approach. The fund charges reasonable expense ratio of 0.35% to execute its strategy.
The international version of this fund is available through the DeltaShares S&P International Managed Risk ETF (DMRI) and several other quantitative ETFs have launched this year with similar structural processes. It’s worth noting that these risk-focused funds will likely experience slower growth during cyclical uptrends due to their more conservative positioning compared to traditional stock-only indexes.
The Bottom Line
There are literally hundreds of new ETF launches that I haven’t touched on, but will be readily available for all investors to dive into for 2018. It’s always worth evaluating how some of these new funds stack up to your existing holdings or where they may be useful to plug any obvious gaps in your portfolio strategy. As always, the best course of action is a thorough analysis of their composition, costs, and trading patterns to understand what you will own before you own it.