The exchange-traded fund (ETF)1 space remains a top focus for investors and financial professionals worldwide. Below, I look at three trends in the space that should continue to gain momentum in the year ahead.
- Active non-transparent ETFs arrive
The approval of active non-transparent ETFs in late 2019 will usher in new active ETF launches in 2020. Passive ETF investing has proved popular with investors in recent years. In 2020, investors will start to see more active ETF choices – strategies that combine active management and the tax-efficient, lower-cost wrapper of ETFs.
- More talk of direct indexing
The term “direct indexing” first appeared in early 2019 and was a topic of discussion at various ETF industry conferences throughout the year. Direct indexing is likely to continue to gain prominence in 2020. Otherwise known as passively managed retail separately managed accounts (SMAs), direct indexing allows portfolio managers to use tax loss harvesting to realize losses that can offset against other investment gains. Realizing net losses in an SMA has the potential to be more tax-efficient than a mutual fund or ETF, where the best-case scenario would be to have no capital gains distributions in a given year. Additionally, mutual funds and ETFs can’t be customized to individual investors’ specifications. Interest in direct indexing should continue to grow in the year ahead, especially among tax-conscious high net worth investors.
- Fixed income ETF net flows may outpace equity ETF net flows
In 2019, fixed income saw greater net demand than equity. Given the continued maturation of a 10-year equity bull market, a looming US presidential election, and continued global political turbulence, many investors are likely to be looking for ways to reduce volatility in 2020. As a result, investor interest in fixed income ETF strategies could increase. A significant amount of these investors’ net flows could go into actively managed ETF strategies as opposed to traditional index funds. Active fixed income ETFs and funds have generally outpaced index ETFs and funds over most periods, and active strategies have the potential to provide enhanced risk management in times of market volatility, which we could face in 2020.
This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary.
Exchange-traded funds (ETFs) trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are not individually redeemable directly with the Fund, and are bought and sold on the secondary market at market price, which may be higher or lower than the ETF's net asset value (NAV). Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns.
Unlike typical exchange-traded funds, there are no indexes that an active ETF attempts to track or replicate. Thus, the ability of an active ETF to achieve its objectives will depend on the effectiveness of the portfolio manager.