The world has already embraced, and many have mastered, the ETF formula. ETFs are the fastest, and frequently, the most economical way for an investor to express their investment thesis in a single trade. Proof? The industry took in an additional $347 billion globally in 2015, topping the previous year’s record of $330.7 billion.
Prediction #1
The big will continue to get bigger.
The big brands as they are called, have brand. Their brand is recognized by advisors, retail and institutions, making it easier to trust their products, because they already know the company. As mid-size and small issuers decide they want to really acquire AUM, “How can we build brand economically,” will be the question asked by those who are seriously seeking to grow. The big firms already have many products, are already designing products where they believe appetite is growing, and they have the huge sales organizations to sell these products across channels. Small and mid-size firms can level the playing field with marketing, but our prediction is that only one or two will break out from the status quo of marketing methods. Their success will be talked about, but few will follow in their footsteps this year.
Prediction #2
There will be no cure for the tracing of allocations back to wholesalers.
The way a “ticket is dropped” is not going to change. These are exchange traded products (hence the name), so there is no ticket, and attribution through data is the only process to improve tracking. This will require investment by issuers and TPMs if they really want the tie-back. Marketing will need to earn its keep through data attribution, and so will sales.
Prediction #3
A few smaller ETF issuers will surprise the markets.
Yes, they will have innovative products, but it will be their use of creative marketing that will set the stage for materially gathering assets. Guess who their agency is?
Prediction #4
The liquidity crisis will continue – real and imaginary.
ETF liquidity is driven by two forces. First, the after-market, meaning trading ETFs themselves. There are X number of shares traded on average per day, but… ETFs are not like stocks, even though they trade similarly. Their ultimate liquidity is driven by a second factor, the total liquidity of their underlying securities. CSD (yes, I designed the underlying index) is driven by the liquidity of its underlying index, which is comprised of around 38 stocks. This means the liquidity of ALL of those stocks (by weight). Many asset owners have not gotten this message and need further education about Authorized Purchaser’s ability to create or redeem ETF shares as they are needed, at NAV, plus a small fee. The industry and press will get further along this learning curve. Hopefully, regulators will as well. The industry will be found not to be the culprit of liquidity squeezes, but as the one to expose the issue. Industry leaders will lead us out of the issue, but regulators will be slow to adopt, causing a few mini-crises that garner great amounts of press.
Prediction #5
Institutions will become an even greater force for both trading and long-term asset holding.
Depending upon the asset class and strategy, institutions are using ETFs to gain exposure in a single trade or by quietly creating new shares (creates). This will continue and grow, as asset owners more deeply understand the processes and embrace their ease.
Prediction #6
ETF models will become more sophisticated.
Robo advisors are really asset gathering patsies for the big ETF issuers. As more of them get VC funded or are started by existing wealth management firms, their models will require differentiation and additional sophistication to keep up with clients’ requirements. On the robo front watch, investment professionals trounce the pure-play tech start-ups in asset gathering just as Schwab and Vanguard have already done.
Prediction #7
Strategy replication using ETFs will gain serious traction.
Seeking exposure to hedge fund strategies, but don’t want to pay 2&20? Perhaps, you seek nuanced exposure to a region? Institutional-strength ETF models will make their way through the consulting world and into institutional, family office, sovereign and UHNW hands, delivering solid returns at a fraction of the fees. This will eventually trickle down to retail and robo, but not this year.
Prediction #8
Some marketing will confuse retail investors.
Advertising needs to have a purpose to be useful. The industry has not yet woken up to this, and still views marketing as an expense. Winning awards and expanding budgets remain the orders of the year for large shops. The break-through-the-clutter ads will not be overly creative. They will be overly effective and carefully segmented by distribution channel.
Prediction #9
More, if not most, mutual fund companies will enter the market.
Not such a neck-stretch to state, but notable as the momentum continues to build. As assets move from mutual funds to ETFs, even with lower fees (think lower revenues), everyone wants in. Watch some major missteps and near failures. Distribution is VERY different for ETFs. A good example is one we covered – tracking, which translates to compensation, which disrupts many current models.
Prediction #10
Entrepreneurs will enter the ETF marketplace.
As the cost of launch and ongoing fees continue to fall due to economies of scale, and become easier to manage, new, out-of-industry entrants will arrive to grab some of the waterfall of AUM. Some with limited knowledge will fail spectacularly. Others will see great success. This may influence my first 2017 prediction.
In summary, we see another banner year for ETFs. Below, are some useful industry stats, aggregated for your use.
ETFs took in a grand total of about $238 billion in 2015—just shy of their annual record of $243 billion set last year. Assets swelled to $2.98 trillion through November, doubling since 2010.
Investors who used ETFs to replace derivatives, including futures and swaps:
• Brought in $10 billion to BlackRock alone in 2015
• ~60% of conversions took place in the U.S.
• Europe saw 35%
• Asia is at an early stage, expected growth in the region to accelerate in the future as well
• Investors held 139 million futures contracts globally at the end of November, down 15% from a year earlier
Smart Beta products
• Growth in the overall ETF industry slowed by a third in 2015
• Smart Beta ETFs also slowed, taking in $29 billion in new flows through Dec. 24, down from $45 billion in 2014
Sluggish growth in U.S. Dividend funds
• Attracting $1.5 billion in 2015, down from $17.4 billion in 2014
ETFs that invest in low-volatility stocks grabbed $10.5 billion, up from $4 billion in 2014.
Funds that invest outside the U.S. took in $108 billion—roughly double the inflows to ETFs that invest in U.S. stocks (ETFs accounted for 45% of all net inflows).
10 biggest outflows: (ticker, name, net flows by MM)
• SPY US – SPDR S&P 500 ETF Trust – 32,174.51
• EEM US – iShares MSCI Emerging Markets – 5,914.37
• VWO US – Vanguard FTSE Emerging Markets – 3,128.10
• XLI US – Industrial Select Sector SPDR – 2,774.30
• XLP US – Consumer Staples Select Sector – 2,139.69
• GLD US – SPDR Gold Shares – 2,035.26
• IYW US – iShares US Technology ETF – 2,017.37
• DVY US – iShares Select Dividend ETF – 1,508.83
• IYR US – iShares U.S. Real Estate ETF – 1,444.72
• IWM US – iShares Russell 2000 ETF – 1,409.54
Top Flow Gainers:
• HEDJ US – WisdomTree Europe Hedged Equ – 13,880.08
• VOO US – Vanguard S&P 500 ETF – 13,083.80
• DBEF US – Deutsche X-trackers MSCI EAFE – 12,563.13
• EFA US – iShares MSCI EAFE ETF – 9,347.21
• AGG US – iShares Core U.S. Aggregate Bo – 7,831.34
• EZU US – iShares MSCI Eurozone ETF – 7,520.28
• VTI US – Vanguard Total Stock Market ET – 7,511.04
• IEFA US – iShares Core MSCI EAFE ETF – 6,701.82
• LQD US – iShares iBoxx $ Investment Gra – 5,782.46
Leveraged ETFs saw $6.3 billion of new money come in, a 26% jump in assets from the beginning of the year, compared with a 12% increase for ETFs as a group.
Investors spent about $20 billion in 2016, playing a rebound in oil. VelocityShares 3x Long Crude Oil ETN (UWTI) took in $2.4 billion, the highest amount of inflows a leveraged ETF has seen in six years. New regs may put an end to the leveraged party. This would be really unfair to retail investors who want these products and the wealth management industry which typically uses these prudently.
Leveraged ETF gains
• UWTI US – VelocityShares 3x Long Crude E – 2,412.25
• UCO US – ProShares Ultra Bloomberg Crud – 1,227.88
• NUGT US – Direxion Daily Gold Miners Ind – 792.70
• UVXY US – ProShares Ultra Vix Short-Term – 718.00
• UGAZ US – VelocityShares 3x Long Natural – 608.81
• ERX US – Direxion Daily Energy Bull 3X – 465.94
• TVIX US – VelocityShares Daily 2x VIS Sh – 319.47
• LABU US – Direxion Daily S&P Biotech Bul – 188.74
• BIB US – ProShares Ultra Nasdaq Biotech – 151.98
• GASL US – Direxion Daily Natural Gas Rel – 140.59
Andrew Corn is a former Index Designer for ETFs. He founded Clear Indexes in 2006, which was sold to Beacon Trust in 2008, where he was CIO-Equities and managed the index group. Today, he is CEO of E5A Integrated Marketing, heading strategy, consulting with clients regarding positioning, messaging, product development, advertising, selling agreements, and distribution.
www.E5AIntegratedMarketing.com
Data Sources
http://www.bloomberg.com/news/articles/2016-01-04/etf-inflows-hit-record-as-blackrock-sees-shift-away-from-futures
http://www.bloomberg.com/news/articles/2016-01-04/five-key-takeaways-from-2015-etf-flows
http://seekingalpha.com/news/3009946-blackrock-global-etf-industry-hits-record?ifp=0