Looking toward 2018, ETF investors should be re-evaluating their investment portfolios and plan for the year ahead.
On the recent webcast (available on demand for CE Credit), ETF Top Trends and Insights for 2018, Salvatore Bruno, Chief Investment Officer and Managing Director for IndexIQ, outlined a year that has so far exceeded many observers’ expectations. Bruno pointed out that the economy has been steadily improving, with unemployment rates lower, personal consumption and expenditures rising, household debt down, consumer confidence higher, ISM manufacturing PMI strengthening, industrial production increasing and U.S. GDP expanding.
Nevertheless, Bruno warned of more muted growth ahead as the economy extends its expansionary direction. The U.S. economy expanded 3.0% in the third quarter of 2017, but the mean forecast calls for a 2.1% growth in the fourth quarter of 2018. Furthermore, investors may also see market growth slow down as S&P 500 price-to-earnings ratios have steadily risen toward historic highs, with energy and information technology sales and earnings growth leading the charge.
Meanwhile, the fixed-income market has surprised observers as yields on government debt remain depressed and spreads on short- and long-term Treasury bonds tighten. Bruno also pointed out that tighter spreads in the bond market may reflect a growing economy, rising profits and higher commodity prices.
Given the ongoing depressed yields after the multi-year bull run in the bond market, fixed-income investors may be exposed to greater risks, especially if they are tracking traditional benchmark fixed-income indices.
“The composition of the Barclays Aggregate Index has changed, significantly altering its risk/reward profile,” Kelly Ye, Director and Fixed Income Research Analyst for New York Life Investments, said. “Today, investors are over-exposed to interest rate risk in the form of duration while being compensated with a lower yield.”
Consequently, Ye argued that investors may consider looking toward higher quality, high-yield debt as a way to improve returns while diminishing risk.
For instance, investors may consider alternative fixed income ETF offerings from IndexIQ, including three first-of-their-kind factor-based fixed income offerings: the IQ Enhanced Core Bond U.S. ETF (NYSE Arca: AGGE) and IQ Enhanced Core Plus Bond U.S. ETF (NYSE Arca: AGGP), which were launched in May of 2016, and the IQ S&P High Yield Low Volatility Bond ETF (HYLV), the first high yield low volatility fixed income ETF, which launched in February of 2017.
The ETF industry has also capitalized on the ongoing bullish environment. ETF asset inflows are enjoying another record year, with year-to-date inflows already outpacing the overall assets gained for the whole of 2016. Smart beta has also attracted its fair share of interest, notably smart beta income ETFs, which nearly saw assets doubled in 2017.
While the commodities space has been among the weaker segments of the markets, Bruno argued that there are opportunities in the current commodities cycle, especially since commodities typically follow a well-worn boom and bust cycle. Investors interested in the global natural resources space can take a look at broad ETF options, such as the IQ Global Resources ETF (NYSEArca: GRES).