As we look ahead to 2019, there are many reasons for investors to be feeling good — a strong and growing US economy, a positive global stock market and relatively low interest rates. However, investors may want to be cautious as they enter the new year. To accomplish the goal of having a well-positioned portfolio, it is important to be thinking about the future and how to navigate an ever-changing market environment.

Here are five trends we see as important for 2019 in the exchange traded funds (ETF)1 space.

Trend #1: Average volatility in equity markets will likely be higher in 2019 than 2018
In last year’s ETF outlook report, we predicted an increase in equity market volatility. We saw this happen in late January and early February, highlighted by the Chicago Board Options Exchange Volatility Index® (VIX)2 reaching an intraday high of 50 – rising from its recent average of about 10. In 2019, we expect average volatility to be higher than it was in 2018. We expect this volatility to return in spurts — with some abrupt spikes that are likely to be as high as double the late-August low of 12 on the VIX.

The reasons behind market volatility are likely to be multi-fold, but they include extended equity market valuations, political instability, trade wars. Investors may want to consider lower volatility investment solutions to combat these risks. There are several equity ETF strategies available to investors that seek to provide above market returns with less volatility risk, including the Natixis Seeyond International Minimum Volatility ETF (MVIN).

Trend #2: Continued interest rate increases
The US economy and labor markets remained strong through the summer of 2018 and The Federal Reserve (The Fed) has signaled they will continue to raise interest rates gradually in 2019. Investors should carefully consider the impact of rate increases when making asset allocation decisions. Interest rate increases are likely to impact long-term bonds and bond funds more so than short-term bonds and bond funds. Short-term bonds and short-term bond ETFs like the
Natixis Loomis Sayles Short Duration Income ETF (LSST) have the potential to protect investors from principal losses that can occur as a result of rising rates.

Trend #3: Active non-transparent ETFs moving through SEC review process
Currently, all active ETFs in the US need to disclose their holdings daily. This has probably dissuaded many asset managers who focus on active investment management from launching ETFs. They are likely reluctant to disclose their holdings each day, for fear that investors could trade ahead of them and take advantage of their analysis and insights. Natixis Investment Managers is one of a small number of asset managers that has filed with the US Securities and Exchange Commission (SEC) with the goal of bringing active non-transparent ETFs to market. Freeing active ETFs from having to disclose their holdings daily has the potential to level the playing field within ETFs, allowing more active fund managers to launch ETFs alongside the more passive investment strategies currently available in the marketplace.

Trend #4: Political instability remains a risk
Geopolitical instability, including tensions between the United States and North Korea, likely helped to cause some market volatility in the first half of 2018, but this turbulence saw a relative easing in the latter half of the year. Following an historic face-to-face summit between President Donald Trump and North Korea’s Kim Jong Un, North Korea publicly agreed to cease their nuclear program. However, post-summit negotiations have proved challenging. Other geopolitical risks that could influence markets in 2019 include Brexit, US-Russia relations, and ongoing trade disputes between the US and China.

Trend #5: Inflation will also remain a risk
If the growth of the US economy continues along unabated and if unemployment falls below 4%, we expect price increases may begin. While the Fed stands ready to do all that it can to keep inflation below their 2% target, pressure could mount. We believe rising inflation is a clear risk to the economy in 2019.

New Opportunities, New Challenges
The current strength of the US economy and the equity markets have made for an exciting 2018, and we are cautiously optimistic about 2019. The best way for investors to ensure they are prepared for both the opportunities and challenges in the year ahead may be to construct prudent, durable portfolios designed to provide both upside potential and downside protection.
1 An exchange-traded fund, or ETF, is a marketable security that tracks an index, commodity, bonds, or a basket of assets like an index fund. ETFs trade like common stock on a stock exchange and experience price fluctuations throughout the day as they are bought and sold.

2 The CBOE Volatility Index (the VIX) measures the implied volatility of the S&P 500® Index. The VIX is quoted in percentage points and represents the expected range of movement in the S&P 500 index over the next year. For example, if the VIX is 15, this represents an expected annualized change of less than 15%, up or down.

MVIN: The Fund seeks long-term capital appreciation with less volatility than typically experienced by international equity markets.
LSST: The Fund seeks current income consistent with preservation of capital to pursue higher yield potential in short duration yield securities.

Before investing, consider the fund's investment objectives, risk, charges, and expenses. Visit im.natixis.com for a prospectus or a summary prospectus containing this and other information. Read it carefully.​

ALPS Distributors, Inc. is the distributor for the Natixis Seeyond International Minimum Volatility ETF and the Natixis Loomis Sayles Short Duration Income ETF. Natixis Distribution, L.P. is a marketing agent. ALPS Distributors, Inc. is not affiliated with Natixis Distribution, L.P.

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