Exchange traded funds themes to keep an eye on in 2015 include increased use of ETFs by institutional investors and the ability of ETF strategists to attract and retain assets.
With the U.S. ETF industry now home to over $2 trillion in assets under management, it is accurate to say institutional investors have been significant drivers of that growth. In its 2014 U.S. Institutional ETF Usage Report, released earlier this month, BlackRock (NYSE: BLK) notes the “results show that institutional use of ETFs is expected to rise across the board. This trend holds true for both existing institutional ETF investors and those who do not currently hold ETFs.” [Institutional Use of ETFs on the Rise]
Another important theme will be how much advisors and strategists opt to deviate from the traditional 60%/40% equity-bond split, particularly with the current bull market advancing in age. Some strategists are using ETFs for more nimble, highly tactical approaches.
Windham Capital Management’s “Windham Risk Regime I strategy, for example, can have as much as 80% of its assets in defensive assets (global fixed income) and as little as 20% in growth assets (global equities, global real estate and commodities) or could shift to a 20% defensive/80% growth mix,” said S&P Capital IQ in a new research note.
Windham identifies global risk factors prior to making portfolio adjustments and proceeds to identify attractive ETFs based on relative valuations, according to S&P Capital.
Current Windham holdings include the large, highly liquid Vanguard funds such as the Vanguard Total Stock Market ETF (NYSEArca: VTI) and the Vanguard Small Cap ETF (NYSEArca: VB).
Home to nearly 3,800 stocks, VTI offers a deeper bench than S&P 500 funds while giving investors ample access prominent themes, such as the strengthening U.S. economy and the potential continuation of the Federal Reserve’s low interest rate policy. VTI has gained legions of devoted fans due in part to its scant 0.05% expense ratio, which makes the ETF less expensive than 95% of comparable funds. [ETFs for College Savings Funds]
Speaking of legions of fans, VTI, which S&P Capital IQ rates overweight, has add over $6.4 billion in new assets this year, a total surpassed by just six other ETFs.
Although small-caps have disappointed for much of this year, the group has recently started to perk up. If the small-cap rebound is legitimized in 2015, VB will benefit. The ETF, also rated overweight by S&P Capital IQ, is home to nearly 1,500 stocks. Like many of its Vanguard peers, VB is also inexpensive at the fee level with an annual expense ratio of just 0.09%. [Build a Dirt Cheap Portfolio With These ETFs]
“Lucas Turton, Chief Investment Officer for Windham Capital Management, told S&P Capital IQ in early December that correlation between various asset classes have been rising, which suggests that taking on the higher risk in small-caps and emerging market equities is not likely to be as rewarded as it was earlier in the year. He highlighted the Strategy’s increased positions in various short-term fixed income ETFs that we believe will help provide protection if interest rates moved higher in 2015,” said S&P Capital IQ in the note.
Windham’s fixed income holdings include the Vanguard Short-Term Corporate Bond ETF (NasdaqGM: VCSH) and the SPDR Short-Term High Yield ETF (NYSEArca: SJNK).
While 2014 has been a year of fits and starts for traditional junk bond ETFs, SJNK has steadily gained a following due to a duration of 2.47 years, which is slightly more than half that of traditional junk bond ETFs.
At a time when market observers are concerned about the exposure of high-yield ETFs to the energy sector, SJNK’s utility becomes more apparent because its weight to energy paper is less than the allocations to energy debt found in marquee high-yield bond ETFs. [Less Energy Exposure With These Junk Bond ETFs]
Rated marketweight by S&P Capital IQ, SJNK has added over $1 billion in assets this year, bringing its AUM total to $3.85 billion since its March 2012 debut.
Vanguard Total Stock Market ETF
