IndexIQ has identified what it sees as the top five exchange traded fund (ETF) market insights and trends for 2016.
Fisrtly, IndexIQ believes that currency hedging will be fuelled by divergent economic policies.
“The Fed’s tightening (the pace of interest rate increases) will be a source of constant speculation among both stock and bond investors and may introduce volatility to the yield curve,” says IndexIQ. “There is even some speculation that, given global economic weakness, the Fed may be forced to reverse course. We believe that at a minimum, the divergence of central bank policies will create further market distortions with the relative movement of currencies having a bigger than usual impact on returns.”
Secondly, IndexIQ’s view is that inflation may finally start to make its presence felt. With the US economy continuing to expand and wage growth showing some signs of accelerating, the firm says inflation may spring to life in the coming year, providing a new source of market worry. If history is any guide, once prices start up they’re not always easy to contain. A multi-asset strategy built on asset classes that have historically performed well during periods of inflation is one way to hedge against this possibility.
Thirdly, IndexIQ thinks hedge fund strategies may become more attractive. In a rising rate environment where fixed income investments decline in price, the firm says that investors may want to consider allocations to strategies that have the potential to go up in a rising rate environment yet provide relatively low volatility. This is the traditional role played by “hedged” products, and the confluence of these trends point to resurgence in interest in these vehicles.
Fourthly, according to IndexIQ, commodities may finally find a bottom. While the company admits that his is a tough call, it does take advantage of one of the more powerful forces in investing: regression to the mean. “Oil, copper, and other basic commodities have been pummelled,” says IndexIQ. “We believe that at some point, they’re bound to recover and this might be the year. At the very least, we believe commodities will be worth a fresh look after new rounds of easing in China and Japan. Suitable investors who agree with this thesis may want to consider at least a modest exposure to the asset class.
Finally, IndexIQ sees dynamic ETF innovation continuing at a rapid pace. “We expect the growth of the ETF industry to continue at a rapid pace, with dynamic innovation continuing, as fund sponsors look for new ways to help meet the changing needs of investors. We believe liquid alternatives will see increased demand as diversification tools to help investors manage volatility. Global M&A (merger and acquisition) activity is also likely to remain elevated as companies look to grow through acquisition. In 2016, the products likely to find favor are those that help manage domestic and international equity volatility, interest rate risk, and the impact of currencies on investors’ portfolios.”
Adam Patti, CEO of IndexIQ, says: “The slowdown in China, an unsettled geopolitical situation, the ongoing impact of currency devaluations on growth and trade, and a pending US election suggest that investors will be grappling with increased market volatility in 2016. As central bank policies diverge and a broad range of generally non-correlated asset classes show greater independence, we believe investors will increasingly look to liquid alternative products to help manage potential fixed income, equity, and currency volatility impact on their portfolios.”
Noting that assets in alternative ETFs already exceed USD350 billion, Patti believes that innovation in the ETF industry will continue, as fund sponsors look for new ways to meet the changing needs of investors. “We may see other new developments in ETFs in 2016, including the entry of several new players into the space, so competition is going to remain fierce,” he says. “What’s important is that we as an industry don’t let our product innovation out-kick our educational efforts. It’s important that investors and advisors continue to receive the support they need to make well-informed decisions about what types of ETFs might be right for their needs and goals, and the best ways to trade ETFs going forward.”