ETF outlook underscores 'innovators,' redefined active funds

The advancing ETF industry is expected to take a few critical turns

ETF outlook underscores 'innovators,' redefined active funds
2017 was a stellar year for ETFs, with data from ETFGI indicating a 34.3% surge over the period that brought US-listed ETF assets to a new high of US$3.42 trillion at the end of December. Globally, the industry was also influential and disruptive, spurring new challenges in investment research and inspiring expectant outlooks.

Heading into 2018, experts see continued growth in the space, though they see it going in new directions. For one thing, more products and issuers should be expected in the US market, Toroso Asset Management’s Michael Venuto told the Wall Street Journal. In his view, new funds and issuers will consist of hot ideas, catch-up moves by existing asset managers and insurers, and investment managers refashioning separate accounts into ETF strategies.

Optimal Capital’s Chief Investment Officer Ray Batcha also predicted an increased role for fringe investment strategies. Exploding niches like marijuana and bitcoin inspired more than 20 applications to list ETFs focused on these spaces, according to Bloomberg ETF analyst Eric Balchunas. Batcha told the Journal that other esoteric strategies, such as ETFs offering downside protection through options and swaps, could get more attention.

Another prediction: the traditional high-cost/low-cost barrier between active and passive investment will be demolished. Vanguard, the passive-fund behemoth, is expected to roll out low-cost, actively managed ETFs within the first quarter. That’s on top of its entry into the active equity ETF space — reportedly the sleepiest corner of the ETF market.

Digital wealth platforms, previously considered a threat to established financial institutions, are being re-cast as an opportunity and a necessity. Major ETF issuers like BlackRock and Vanguard have amassed billions of dollars in new assets through their digital platforms. Morgan Stanley and Merrill Lynch have each built their own; in December, JP Morgan announced plans to follow suit.

Finally, the case for fixed-income ETFs has become stronger than ever. According to Todd Rosenbluth, CFRA’s senior director of ETF and mutual-fund research, rising short-term interest rates and a flattening US yield curve will drive increased scrutiny of fixed-income fund performance, pushing more investors to consider ETFs.

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