Capital Markets Desk: ETF 2019 Flows: Three Interesting Takeaways

Let’s start with the first point about flows into low-cost ETFs, which is something we talked about back in my 2018 outlook post.

ETF flows, and it is one of the biggest factors behind the launch of our passive suite of funds.

Given the ease of trading, in my opinion, there really is no excuse for using higher-fee funds of similar exposure—unless you are part of the also growing group of investors who are looking for a specific portfolio that provides a specific outcome. In this case, the rules of the index matter. The philosophy of the fund matters. The performance matters. That was my lead for my 2019 industry predictions.

A “Smarter” Equity Investor?

I had predicted inflows into smart beta ETFs would reach $100 billion this year, and although we don’t seem to be at a pace to hit it, I think the percentage of equity assets flowing into smart beta is very impressive. As to why this is happening, a couple possibilities come to mind.

The first is that investors have acknowledged there are other index rules besides simply letting market price determine the weight of the stock. The second is that many of these smart beta funds have performed very well over the past few market cycles.³

Fixed Income Favored

Lastly, it is impossible to ignore the fact that well over half of the flows in 2019 have gone to fixed income ETFs. With all the attention in 2019 on what the Federal Reserve might do and where interest rates might go, it is no surprise to see so much activity within the fixed income ETF space. What is somewhat new in 2019 is that many investors have realized ETFs are a great vehicle to express those fixed income views.

I think it is only a matter of time before all three of these trends collide, and investors start gravitating to both active and smart beta fixed income funds.

For now, the flows are going mainly into traditional passive fixed income funds. Hmmm…perhaps we have our first entry into the 2020 predictions column…

What Are the Risks?

All investments involve risks, including possible loss of principal. For fixed income funds, bond prices, and thus a fund’s share price, generally move in the opposite direction of interest rates. Special risks are associated with foreign investing, including currency fluctuations, economic stability and political developments; investments in emerging markets involve heightened risks related to the same factors. To the extent a fund focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a fund that invests in a wider variety of countries, regions, industries, sectors or investments. Performance of the funds may vary significantly from the performance of an index, as a result of transactions costs, expenses and other factors. These and other risks are discussed in the fund’s prospectus.

ETFs trade like stocks, fluctuate in market value and may trade at prices above or below their net asset value. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price, not their Net Asset Value (NAV), on the exchange on which they are listed. Shares of ETFs are tradable on secondary markets and may trade either at a premium or a discount to their NAV on the secondary market.

For more information on any of our funds, contact your financial advisor, download a free prospectus or call us at (800) DIAL BEN/342-5236. Investors should carefully consider a fund's investment goals, risks, sales charges and expenses before investing. The prospectus contains this and other information. Please read the prospectus carefully before investing or sending money.