Credit: Shutterstock photo2015 was another busy year for the Exchange Traded Fund (ETF) industry with 284 new launches in the US, taking the year-end ETF asset totals in the US to $2.135 trillion. Analyzing these new launches provides interesting insights both into changes in investor sentiment and the availability of new investment strategies. Below we take a look at some of the key trends from 2015’s ETF launches.
1. The continued popularity of ‘smart beta’ ETFs
The most significant trend in ETF investing in the last 2-3 years has been the growth in smart beta ETFs. Although a smart beta ETF tracks an index just like a traditional ETF does, it deviates from the traditional approach of weighting stocks by market capitalization. Instead, it provides rules-based exposure to specific investment factors (such as low volatility or value) designed to capture excess returns relative to the broad market benchmark. As we can see in the chart below exported from our ETF analytics platform, smart beta ETFs accounted for half of all ETF launches in 2015.
ETF data & analytics: First Bridge Data; January 2016
The 143 smart beta ETFs launched in 2015 spanned a range of strategies, including:
- Multi-Factor Equity: These index methodologies select and weight securities that score high on investment factors that the investment manager thinks could potentially beat the broad market. Many multi-factor equity ETFs launched this year included factors such as low volatility, momentum, value, high quality and high dividend yield. 45 of the 143 smart beta ETFs launched in 2015 were multi-factor ETFs, and some large investment firms either entered or expanded their presence in the ETF space via multi-factor products. Some examples of these ETFs include the iShares FactorSelect MSCI USA ETF (‘LRGF’), Goldman Sachs ActiveBeta Emerging Markets Equity ETF (‘GEM’), John Hancock Multifactor Large Cap ETF (‘JHML’) and JPMorgan Diversified Return Emerging Markets Equity ETF (‘JPEM’).
- Hedge Fund replication: ETFs have already been taking assets away from traditional active long-only mutual funds. An area that saw increased activity in 2015 was ETFs that aim to replicate different hedge fund strategies. Examples of these ETFs include the AlphaClone International ETF (‘ALFI’), Highland HFR Equity Hedge ETF (‘HHDG’) and the IQ Hedge Event-Driven Tracker ETF (‘QED’).
- Dividend Strategies: This has always been a popular investment category due to the income needs of the retiring baby boomer generation. Interesting new ETFs launched in 2015 in this category included the SPDR S&P 500 High Dividend ETF (‘SPYD’), ProShares MSCI Europe Dividend Growers ETF (‘EUDV’) and Global X SuperDividend Emerging Markets ETF (‘SDEM’).
2. Thematic & Strategy ETFs for the current economic environment
In a sign that the ETF industry has become more mature, sponsors brought ETFs to market in 2015 so as to coincide closely with prevailing market conditions and emerging themes. This gives investors a broader set of tools that are relevant to portfolio construction in the current market environment.
- Cross-industry themes: ETF launches in 2015 targeted emerging themes such as cybersecurity (First Trust Nasdaq Cybersecurity ETF; ‘CIBR’), big data (PureFunds ISE Big Data ETF; ‘BDAT’) and climate change (SPDR S&P 500 Fossil Fuel Free ETF; ‘SPYX’ & Etho Climate Leadership US ETF; ‘ETHO’). These ETFs provide investors with the ability to get low cost, broad based access to stocks that are likely to benefit from these trends, without having to pick 1 or 2 winning stocks in each category.
- Duration optimized bond ETFs: One of the biggest narratives of 2015 (that will continue into 2016) was the rise in US interest rates. In response to this, ETF sponsors bought bond ETFs to market that have a duration matched short position, based on the thesis that they would be less susceptible to interest rate increase. An example of an ETF in this category is the Deutsche X-trackers High Yield Corporate Bond - Interest Rate Hedged ETF (‘HYIH’).
- Low Volatility: With the volatile start to 2016 after an over 6 year bull market in equities, these ETFs may be an alternative for investors who are concerned about volatility but want to stay invested in equities. 11 ETFs launched in 2015 in this investment category including the PowerShares S&P 500 ex-Rate Sensitive Low Volatility Portfolio (‘XRLV’) and SPDR Russell 1000 Low Volatility Focus ETF (‘ONEV’).
3. Currency Hedging
Finally, as discussed in a previous column, currency hedged ETFs have been gaining in popularity in the last 3-4 years. However it is still worth highlighting this category given that the dollar has been very strong recently and may continue to be, given the divergent monetary policies in the US and Eurozone. Also, currency hedging is now available for more specialized strategies and industry sectors, giving investors more options to choose from.
Some new ETFs launched in this category include the SPDR S&P International Dividend Currency Hedged ETF (‘HDWX’), iShares Currency Hedged MSCI ACWI Minimum Volatility ETF (‘HACW’) and Wisdom Tree Europe Hedged Small Cap Equity Fund (‘EUSC’). These products may be useful to investors who want to continue to be invested in markets outside the US without the negative impact of the conversion risk from a stronger dollar.
Overall, the range of ETFs launched in 2015 spanned multiple asset classes and strategies, with an emphasis on smart beta, currency hedging and thematic ETFs (a complete updated ETF list can be downloaded here). It seems likely that 2016 will also be another robust year in terms of product launches for this fast growing investment vehicle, which should benefit investors.
Aniket Ullal is the founder and CEO of First Bridge Data, a provider of independent ETF data and analytics to institutional clients. First Bridge is not affiliated with any ETF sponsor and does not promote or distribute any ETF products.
This article should not be considered investment advice. Both the author and First Bridge Data LLC shall not be liable for any actions or decisions made based on the information provided in this article. First Bridge Data LLC is not a registered investment advisor or broker, and does not recommend specific securities, funds, or investment strategies, nor does it advocate the purchase or sale of any individual investment vehicle.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
