Trends in Exchange-Traded Funds

ETFs At a Glance:

  • Top 3 providers: iShares, SPDR, and Vanguard have virtually the same level of market share: just over 81%.

Competition Trends:

  • Growth in numbers of active ETF strategies expected to continue, allowing investment managers flexibility to enhance returns.
  • Competition in the space will be reducing fund expenses as ETF providers fight to attract assets. Current expense rates are around 0.5% to 1.0% and have dropped to about 0.5%.

Strategy Outlook:

  • Sector ETFs: increased volatility in these kinds of strategies, but they are increasingly part of the dialogue.
  • Energy sector rebound: Valuation (Based on price to book ratio) and oil prices are leading to this forecasted rebound.
  • Retails also predicted to rise.
  • US-dollar based: Deflationary period will lead to increased interest.
  • ETMF: new investment vehicle from Eaton Vance. Non-transparent vehicle: could cause many mutual fund managers to switch to this structure bring a new crop of active funds to the market.
  • Dividend growth: assuming interest rates could increase, this area will be central for equity investors.
  • Fixed income: fixed income smart beta could be marketed as an attractive alternative to traditional bond indices.

Smart Beta Trends:

  • Smart-beta ETFs are a hybrid of active and passive ideas: based on indices that track specific rules or adhere to pre-described factors like low volatility, valuations and price momentum. Smart beta could become an entirely separate investment category in upcoming years.
  • Smart beta is one of the most meaningful developments on the investment landscape.  There will be more agreement on classifications within the smart beta category.
  • Minimum volatility strategies may see a resurgence: smart beta strategies are an example of risk management type products.