1. The launch of active non-transparent ETFs
Currently, as of June 30, 2019, all active ETFs in the US need to disclose their holdings daily. This has likely dissuaded many active asset managers from launching ETFs, for fear that investors will trade ahead of them. Because of this challenge, a small number of asset managers – including Natixis Investment Managers – have filed with the Securities and Exchange Commission for permission to bring active non-transparent ETFs to market. This is arguably the most important innovation within the ETFs industry in the last 10 years. Freeing active ETFs from having to disclose their holdings daily could help level the playing field within the ETF space, allowing more active fund managers to launch ETFs alongside passive fund managers. We expect some providers begin to launch active non-transparent ETFs before the end of 2019.
2. Political instability could lead to market volatility
Challenges related to US relations with Iran, the US-China trade dispute, and Brexit could lead to increased political instability that may unnerve financial markets in the second half. When it comes to vetting ETFs for use as building blocks of a portfolio in such an environment, it is important to evaluate how each product will behave with market movements. In general, active ETFs have the potential for more timely adjustments to unusual market conditions than passive ETFs. Either way, be mindful of the potential impact of this volatility on portfolios.
3. Equity market turbulence may continue
We anticipated average volatility to be higher in 2019 than it was in 2018 – and have been right on this call so far this year. We expect this volatility to further intensify through the rest of 2019. While we expect the volatility to come in spurts, its impact on investor portfolios can be significant. The reasons for the spikes may be varied, but they could include extended equity market valuations, and the geopolitical instability mentioned above. Investors would be wise to consider lower volatility investment solutions to help combat volatility risks. One example of such a strategy is the Natixis Seeyond International Minimum Volatility ETF (MVIN).
4. Yield curve normalization
We saw the yield curve become inverted in the first half of 2019, with shorter-term bonds offering a higher yield than bonds with longer-term maturities. This is a rare occurrence and has historically signaled a slowing of the economy or recession. In this kind of environment, investors may want to harness the excess yield that is available in short-term bonds. This could mean rotating out of longer-dated debt and into shorter-term debt. The Natixis Loomis Sayles Short Duration Income ETF (LSST) is one strategy investors can consider. Looking ahead, we expect the Federal Reserve Board to decrease interest rates one or two times in the second half of the year, which is likely to result in a more normalized yield curve.
5. Global economic slowdown
Many signs have been pointing to a slowing of the global economy. This is particularly apparent in large economies like the US and China. We would not be surprised to see two quarters in a row of slowing US GDP growth, which is the technical definition of a recession.
The second half of the year is likely to provide a continuation of the dynamic market conditions we saw through the first six months of 2019. As they seek to accomplish their financial goals, investors working with an investment professional may want to consider an active approach designed to provide both upside potential and protection from downside risk. Natixis has several choices within its lineup of ETFs, mutual funds and separately managed accounts that meet this need.
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.
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.
Equity securities are volatile and can decline significantly in response to broad market and economic conditions. Growth stocks may be more sensitive to market conditions than other equities, as their prices strongly reflect future expectations. Foreign and emerging market securities may be subject to greater political, economic, environmental, credit, currency and information risks. Foreign securities may be subject to higher volatility than US securities, due to varying degrees of regulation and limited liquidity. These risks are magnified in emerging markets.
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.
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.