2016 saw continued inflows into ETFs, and saying that the trend will continue into 2017 is not much of a fearless forecast. However, the past year was also punctuated by a price war and a record number of 127 ETFs closed globally. Keeping that in mind, the coming year will present both challenges and opportunities for the space, reports the Wall Street Journal.
First, lower expenses on funds will continue to be a factor, but fees will start to play a role. Plain index-fund ETFs – including ones offered by Vanguard, BlackRock and Charles Schwab – have expense ratios lower than 0.05%, which accounts for their general outperformance. However, the growing market for “smart beta” ETFs will expose more investors to additional costs. “Investors continue to learn more about the different facets that go into ETF prices and why they cost what they do,” said Tim Coyne, global capital markets head of State Street’s SPDR ETFs team.
Second, the Department of Labor’s fiduciary rule requiring retirement advisors to act in their client’s best interests will drive assets away from funds with sales loads or trailer fees. In Canada, a parallel shift is under way as new reporting rules imposed on advisors under CRM2 take effect. Even as funds announce changes in fee structures for the benefit of clients, ETFs and other lower-cost index funds may retain their competitive advantage for some time.
Third, smart-beta is expected to get more of a push as the non-passive products expand into fixed-income, value, and dividend investing. The non-passive flavored product is getting some attention from cautiously optimistic institutional investors. US-listed smart-beta ETFs drawing more than US$41 billion in assets in 2016 through Nov. 30, with an end-of-period total of US$540 billion. Should these ETFs withstand the test of time, higher-cost quantitative strategies and struggling hedge funds may be in for trouble.
Fourth, the expanding adoption of automated advice will benefit ETFs. No longer the exclusive tool of upstart “robo advisors,” automated rebalancing via ETFs is being married with a human touch, leading to hybrid products from established brands. With Vanguard and Charles Schwab leaping into the fray with such offerings, ETFs will likely play a bigger role in retail investors’ portfolios.
Finally, the active approach will become more favored. The past year’s events have shown the benefits of overweighting or underweighting ETFs with specific investment mandates, allowing investors to capture gains or minimize losses. However, since such a direction requires keen awareness and analysis of both domestic and international policy and international rhetoric, buy-and-hold investors will likely still be better off relying on low-cost broad-market funds.
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