RYE BROOK, N.Y., Jan. 9, 2017 /PRNewswire/ -- The team at IndexIQ, a leading provider of innovative investment solutions, today announced their top five ETF-focused trends and insights for 2017:
1. Volatility is likely to rise.
Expectation: A significant equity valuation gap has emerged since the Global Financial Crisis, captured in the fact that earnings per share in the S&P 500 have increased by approximately 129% since April 2009, while the total return of the S&P 500 index over that same time period has been 190%. Stock buybacks have been falling sharply (Q3 2016 saw a 44% decrease in the number of buybacks from Q3 2015)1, removing synthetic share buying from the markets. The U.S. election and other geopolitical trends seem to be favoring populist movements, not just in the U.S. but in Europe, which is still dealing with the fallout from the Brexit vote; and in South America, which saw the defeat of the FARC2 referendum in Colombia. All of these factors and more set the stage for what we believe will be an increase in volatility in 2017, making it important for investors to diversify across investment strategies and consider approaches designed to provide downside protection.
2. Divergent central bank policies will introduce even more uncertainty around currency moves.
Expectation: The U.S. Federal Reserve is clearly about to embark on a tightening path, while at the same time the European Central Bank, Bank of England, and Bank of Japan are still pursuing their easing policies. The conventional wisdom seems to be for U.S. dollar strength in the New Year, but we did not see dollar strength in 2016, despite that being the same conventional wisdom at the start of this year. Predicting currency moves will continue to be a losing game for investors in 2017, and maintaining at least a partial currency hedge in an international equity portfolio could help mitigate some volatility and risk.
3. Growth of ETF industry assets will continue.
Expectation: ETFs saw an approximately 14% growth rate in their overall assets this year through mid-August,3 which was roughly the same rate of growth experienced by the industry over the previous 12 months. That trend is likely to continue as ETFs have displayed competitive performance. Further, there is increasing pressure on fees that make ETFs attractive. And there are questions about how a Trump presidency will impact new Department of Labor rules. If enacted as announced, the rules appear likely to cause many advisors to favor the lower cost structure of ETFs over active mutual funds. Estimates as to just how much this will increase the migration of assets from active to passive vehicles vary widely, but it seems clear that these new rules are likely to speed the pace of ETF adoption across the advisor channel.
4. "Smart beta" bond exposures will continue to gain investor acceptance.
Expectation: A flurry of "smart beta" and factor-driven approaches to equity investing has been one of the biggest stories in the world of ETFs over the past several years, and many of these approaches have found wide acceptance, with investors and advisors looking to add opportunities for outperformance to their portfolios. However, of the 783 ETFs that ETF.com currently classifies as "smart beta" only 24 come from the fixed income segment. In a low yield, low growth environment, we believe strategies that allow investors to add additional opportunities for growth and income to their portfolios could prove attractive. As with any new category, the key will be education and understanding how various approaches work.
5. Investors will continue to shift assets back into commodities
Expectation: A weaker dollar has helped drive strong commodity returns so far in 2016, with gold up approximately 6.3% for the year and oil up more than 37.4%.4 Oil, however, is likely to remain range-bound for the foreseeable future due to Organization of Petroleum Exporting Countries' production caps, which set a floor, and oncoming supply from U.S. shale operations. Still, commodities, gold in particular, have been exhibiting high degrees of negative correlation to the equity market, which will likely draw investors back to the space that has been on the sidelines during the commodity downturn of the past several years. Importantly, though, a diversified approach to commodities should be considered, much the same way an entire portfolio is viewed through the lens of diversification. Over-concentrating in gold and oil – while ignoring other major commodity sub-sectors such as livestock, grains/food/fiber, industrial metals, timber, water and coal – could mean that investors miss out on opportunities for growth and additional non-correlated sources of return.
IndexIQ's senior leaders, including CEO Adam Patti and CIO Sal Bruno, blog frequently about major themes and trends shaping the investment landscape, and will continue to share their thinking and updates to previous topics here: IndexIQ's blog.
IndexIQ is a pioneer and leading provider of innovative investment solutions focused on absolute return, real assets, international and fixed income strategies. IndexIQ's solutions are offered as ETFs, mutual funds, separately managed accounts, and ETF model portfolios. The company's philosophy is to democratize investment management by providing all investors with cost-effective access to the types of high-quality, sophisticated investment products that typically have been reserved for institutional and ultra high-net-worth investors. IndexIQ's mission is to take indexing to the next level by combining the best attributes of both passive and active investing, and make strategies available to investors in low cost, liquid, and transparent products**. IndexIQ is an indirect, wholly-owned subsidiary of New York Life Insurance Company. Additional information about IndexIQ and its products can be found at IQetfs.com.
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All investments are subject to market risk, including possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market.
The information and opinions contained herein are for general information use only. IndexIQ does not guarantee their accuracy or completeness, nor does IndexIQ assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are as of the date of this report, are subject to change without notice. Past performance is no guarantee of future results.
Valuation is the process of determining the current worth of an asset or a company.
S&P 500 is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ
Smart beta defines a set of investment strategies that emphasizes the use of alternative index construction rules to traditional market capitalization based indices.
Liquid alternatives are alternative investment strategies that are available through vehicles that provide daily liquidity, such as mutual funds and ETFs.
All investments are subject to risk and will fluctuate in value. Alternative investments are speculative, entail substantial risk and are not suitable for all clients. Alternative investments are intended for experienced and sophisticated investors who are willing to bear the high economic risks of the investment. Investments in absolute-return strategies are not intended to outperform stocks and bonds during strong market rallies. Hedge funds and hedge fund of funds can be highly volatile, carry substantial fees, and involve complex tax structures. Investments in these types of funds involve a high degree of risk, including loss of entire capital. Investments in derivatives often involve leverage, which may increase the volatility of the investment and may result in a loss.
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1 Source: Morningstar, 10/31/16.
2 The Revolutionary Armed Forces of Colombia-People's Army (FARC).
3 Source: Morningstar, 8/15/16.
4 Source: Bloomberg, 12/15/16.
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