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The continued evolution of the ETF landscape has seen it move from broad-based index replication, to select sectors, based on certain themes or even smart beta (alternative weighting to capture yield or value).
In 2020, ETF Securities expects a number of trends to influence the ETF landscape across economic drivers, investor dynamics and enhanced investment styles. Below is a summary of these, you can also read more detail in the ETF Trends 2020 Whitepaper.
Economic themes for ETFs
Investors have been faced with globally low interest rates across 2019 and this is anticipated to continue due to geopolitical risks, such as tensions between US and Iran, or typical market volatility associated with a US Presidential Election year. Further to that, Australian investors have faced ongoing economic challenges from the slowdown in the resources and residential property sectors, stagnant wages growth and employment figures and will see further repercussions from the devastating 2019/2020 fire season.
These themes will mean the following for ETFs:
The quest for yield may see interest in US fixed income ETFs (due to the higher yield compared to Australia and Europe) as well as ETFs which can offer dividends for alternative sources of income.
Commodity ETFs, particularly gold and silver, tend to benefit from low interest rates due to a low opportunity cost – as an asset with both consumption and investment appeal, it has a low correlation to equity markets and other assets and therefore tends to perform in a range of markets.
Internationally focused ETFs will appeal to those wanting exposures outside of Australia and the weak Australian dollar, such as to regions like Europe, sectors less available in Australia like technology or currencies like the US dollar which continues to be stronger than its counterparts.
Investor dynamics and enhanced investment styles
Increasingly, investors are expecting greater transparency in their investments and want investments to reflect their ethical and social values. Following from the GFC and the Royal Commission, there is also greater cost and fee consciousness. ETFs naturally are benefiting from this environment due to attractive characteristics like transparency, liquidity and typically lower fees. Further to this, improving technology has allowed for greater tailoring of strategies and even active management.
The ETF landscape is growing as a reflection of this.
More ETFs are appearing in the market to offer access to specific themes or growth areas like robotics or emerging markets, or to reflect views or concerns on ethical and social matters, such as the environment.
Continued growth in bespoke and smart beta strategies offering alternative weighting to the index or the ability to exclude certain factors to minimise risks. Some of these strategies are being developed at the behest of larger institutions but may eventually reach retail audiences as technology continues to advance.
Active ETFs are emerging, and with the lift of the ASIC ban in December 2019, are likely to continue to grow.
Across 2020 and the coming years, ETFs are likely to increasingly evolve to fill the gaps in investor needs and demands.
For more information on accessing these trends through ETFs for your clients, please speak to ETF Securities.