Investors continued to pour money into ETFs in September with approximately $35 billion going to U.S.-listed exchange-traded products alone, according to newly released data from BlackRock. These September gains have been led by $23 billion in equity market inflows. However, financials and real estate products experienced outflows during the month.
Todd Rosenbluth of research and analytics provider S&P Capital IQ discusses some of the fastest-growing segments of the ETF space, top technology trends, as well as areas that have fallen short.
Q: With investors continuing to pour money into ETFs, what are the reasons behind this?
A: We've seen a strong U.S. equity market this year. ETFs offer investors a way to get exposure to the broad U.S. equity market. I think we're seeing strong interest in the broader market. And ETFs are a good way to get exposure at a low cost.
Q: Developed market equity products brought in more than $23 billion during September, continuing to drive the overall industry. Do you see continued growth in this area? Why?
A: Investors are more bullish in the investment prospects in underlying stocks, and they're more bullish about the state of the U.S. economy. We think that will continue as long as investor sentiment remains strong. We've seen that investors are more focused on the developed market such as Europe and the U.S. as opposed to emerging markets where there is greater risk and hasn't been greater rewards. Collectively we've seen outflows in that area -so there are still some investing concerns about emerging markets.
Q: What technology do you perceive as most helpful in driving ETF/mutual fund growth?
A: Two things: 1) The ability for self-directed investors and advisors to trade certain ETFs commission-free. And 2) advisors moving to fee based structures from commission based structures, which is favorable to ETFs relative to mutual funds.
Q: What other areas do you see burgeoning within the industry?
A: Equities are the lion's share of the market. However, we still see growth potential for fixed income ETFs. We've seen inflows return, and investors see the benefit of getting tactical with their fixed income investments by managing duration.
Q: Which ETF products have performed most favorably to date this year?
A: Among the sector performers are solar and alternative energy ETFs. Guggenheim Solar ETFs (TAN) is up around 130% this year, for example. Biotechnology has done very well along with PowerShares Dynamic Biotech & Genome (PBE).
Q: Which products have performed least favorably?
A: Gold has been a bad investment this year. Certain emerging markets are also down. Small cap emerging markets ETFs in particular have been very bad performers.
Q: Why have investors seemed willing to return to riskier products in September?
A: We saw the Federal Reserve choose not to change its bond buying program and not to taper -- it's encouraging investors to take on more risk with emerging markets and small cap. There were concerns that they would taper. The fact that they didn't -it was an encouraging sign. Investors are willing to take on more risk, which has encouraged inflows.
Q: What sectors do you like going into 2013?
A: The three sectors we like most: industrials, consumer discretionary, and healthcare. Industrials and consumer discretionary are more tied to the strength of the U.S. economy, which we think will continue to get stronger.
Q: What have been the biggest ETF stories of 2013?
A: I think the trend we've seen from investors focusing on duration -- floating rate bonds and senior loan products have been very popular this year, even though investors have been less enthusiastic about broadly diversified fixed income products. Investors can be as focused as they want to be.
Q: With the current government shutdown looming at the moment, how do you see it affecting fund investors in the long term?
A: We think the shutdown concern is a short-term impact and not a long-term one - as long as the government reopens. We think this is a hiccup. That said, we are highlighting that you can use low-volatility strategies to lower the risk profile. Less the shutdown and more the IF the government defaults -- that will impact the equity and fixed income worlds.
Q: What industry developments in 2013 do you see as the biggest trends entering 2014?
A: We've seen a net increase in products in 2013. There have been many new products launched, and most of them have been targeted to active or quasi active investors. This will continue as investors become more familiar with mutual funds and become more comfortable with ETFs. I think we'll see more of those in 2014-investors to continuing to gravitate to this. We think we'll see continued inflows into the now roughly $1.5 trillion U.S. ETF market.
