Records are set all of the time… in sports, business and in life. The question is once a record is set, should the focus then be on breaking it again or simply pursuing the strategy that got you there?
As discussed in a previous Blog post, we just finished an incredible record year in the ETF industry, with more than $330 billion in new investments. I recently shared this fact with a group of high school students at a mentoring event and why ETF popularity has skyrocketed. Naturally, a group of sophomores and juniors aren’t really considering ETFs or investing in general, as they’re more curious about how to set a course for college. But planning an investment strategy is very similar to planning a career path―you want to set goals, but you also have to be flexible when life throws you a curve.
ETFs can help you do just that. And as more investors discover their benefits, the industry is growing rapidly. While it’s anyone’s guess whether there will be another broken record a year from now, I’m confident that ETFs will continue to gain traction around the globe.
The Role of Flexibility in 2015
Financial markets started the year with several challenges, including increased volatility in markets and currency. ETFs can help you navigate the choppy waters in a variety of ways, two of which I will highlight here.
First, we believe smart beta will continue to grow. The category has quadrupled in the past five years, pulling in over $65 billion in assets in 2014. As my colleague Sara Shores writes, smart beta combines elements of active and passive strategies to accommodate unique investment opportunities. I see two types of smart beta that can potentially help strengthen investor portfolios in 2015:
1. Minimum volatility. These funds could see more demand as investors try to reduce risk during turbulent periods. For an investor, they give exposure to a key index but through targeted holdings, seeking to reduce risk and decrease the market’s peaks and valleys.
2. Single Factor funds. These ETFs are well positioned to gain further traction as fund providers tilt exposures by selecting securities based on specific characteristics or fundamentals such as size, value or quality, or by seeking to mitigate currency risk A couple of examples include the newly launched iShares MSCI International Developed Quality Factor ETF (IQLT) and the iShares MSCI International Developed Momentum Factor ETF (IMTM).
The second area of focus will be on where investors can look for yield. Global fixed income ETFs saw record flows of $84.5 billion last year, an increase of 24% over 2013. While the demand for fixed income ETFs may soften if U.S. interest rates rise as expected, bonds play an important, and continual, role in long-term portfolios. Individuals, financial advisors, banks and insurance companies have increasingly adopted this strategy. We expect to see this pace to continue throughout 2015.
Last will be navigating the currency fluctuations as this will be a key theme this year if the U.S. dollar continues to strengthen against the yen and euro, as expected. Specifically, these funds offer investors exposure to key markets while seeking to reduce the risk of a drag on returns if the local currency depreciates.
It’s impossible to predict whether 2015 will be another record year for ETFs. But with strategies specially designed to help investors of all sizes navigate today’s volatile and divergent markets, I won’t be surprised if more investors see how versatile they really are.