While 2017 is not quite yet in the books, some investors are already looking ahead to what the New Year might have in store for their portfolios. ETF investors have been repeatedly rewarded over the last decade with fresh and innovative funds, lower costs, and better liquidity. They are also becoming more discerning over the expenses and quality of their holdings rather than falling for marketing gimmicks or advisor distribution pipelines.
This foresight will come in handy as these products become even more mainstream in the coming years and 2018 will certainly bring many interesting funds to market. The following are some ETF insights to look out for in the New Year.
A Bitcoin ETF
Love it or hate it, bitcoin is invading our social and financial culture with greater frequency every single day. The Chicago Mercantile Exchange (CME) has announced it will start offering Bitcoin futures trading in mid-December, which could ultimately pave the way for a Bitcoin ETF. The ability for small investors to own or trade a bitcoin-linked derivative in their brokerage accounts is not far off and an exchange-traded product will offer even wider adoption potential. I think this is finally going to happen in 2018 after many years of speculation and regulatory hurdles.
In conjunction with the digital trend are companies poised to benefit from the crypto currency or blockchain technology. There are a number of ETFs currently in registration that will target blockchain-related stocks similar to industry-specific funds with an emphasis on robotics or cyber security.
It’s likely that these ETFs are going to be launched with relatively new indexes and concentrated portfolios that may not be suitable for all but the most aggressive investors. Costs are also going to be above the industry average, but will not likely be much of an impediment for traders who believe wholeheartedly in the blockchain growth potential.
Vanguard Going Quantitative
Vanguard has built one of the most sterling reputations in the financial industry backed by passive investment strategies and ultra-low costs. In 2018 they will be taking a big step by releasing a new suite of six actively managed ETFs based on factor strategies. According to the press release, these categories will include: low volatility, momentum, quality, value, and liquidity.
Many of these strategies already exist and have been successfully deployed by other issuers such as BlackRock and State Street. However, this may be one of the first instances where a fund company specifically targets liquidity as a factor. This ETF will seek out stocks with low levels of trading liquidity as part of its portfolio selection criteria. Given the deep pool of Vanguard research and expertise, I’m particularly intrigued by this approach and whether it will indeed offer a unique portfolio dynamic.
An All-Asset Emerging Market ETF
This one has been on my wish list for a while now and may finally be worth consideration by ETF providers after the surge in emerging market assets this year. A combination emerging market debt and equity ETF would be a solid addition for income investors with potentially lower volatility and higher yields than comparable offerings. Multi-asset funds have grown in popularity over the last several years and I’m hopefully this concept will become a reality for 2018. My fingers are crossed even though nothing along these lines has been announced to date.
Will The Money Stick?
Over $400 billion has flowed into exchange-traded products this year making it the most successful year on record for the ETF industry. Much of this money has been lured away from underperforming active mutual funds, insurance products, and even hedge funds as the bull market hits new all-time highs.
There is no doubt that these investors are better off in low-cost, transparent and dependable investment vehicles. However, the real test is how many investors will ultimately stick with ETFs even during a cyclical or secular downturn. Hot money tends to chase the tail-end of long cycles as fear of missing out on performance or mounting losses stimulate emotional responses.
There will always be ebbs and flows to the capital markets, but it’s my hope that ETF investors make positive behavioral choices even as market dynamics change shape. Global ETF assets have the potential to top $4.5 trillion next year if the bull market continues its charge and asset flows accelerate.
The Bottom Line
The ETF industry has never been in better shape for investors who utilize these tools or those who are considering doing so. 2018 promises to offer an expanded lineup of offerings with even greater potential to integrate with every portfolio type.