Industry Voice: What key trends are likely to shape the ETF industry in 2018?

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Morgane Delledonne, ETF Investment Strategist
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Morgane Delledonne, ETF Investment Strategist

Global equity markets continued to advance in 2017, which led to record breaking flows into ETFs.

The global ETF market exceeded US$4.6 trillion in assets by year-end, with over US$649 billion in new assets1. This tremendous industry growth has been matched by the emergence of new ETFs that transcend the traditional broad market capitalisation index structure, where there are now over 5,300 ETFs globally1.

The diversity of ETFs and array of opportunities available to investors is now greater than ever. An investor today can access traditional equity and fixed income exposures, in addition to innovative market trends such as artificial intelligence or complex derivative strategies such as swaps or covered calls.

Fixed income investing

Going into 2018, fixed income investors are facing a macroeconomic environment where interest rates are rising, the yield curve is flattening and inflation might make a comeback. With ETFs investors have the ability to either build a portfolio, or tilt an existing portfolio to reflect their outlook for interest rate changes, inflation and credit spreads.

Shortening portfolio duration and adding exposure to credit through higher-yielding ETFs has proven to be a popular strategy, while contrarian investors have benefitted from precise exposures in long-term treasuries or corporate bonds.

Thematic investing

Thematic ETFs allow an investor to access an industry trend. There have been several industry trends that ETF providers are pivoting to including; cryptocurrencies, artificial intelligence and ESG investing.

Crypto-mania: Cryptocurrencies have been making headlines in 2017 with the Bitcoin boom. These currencies are high risk and return, are difficult to buy and sell and have low liquidity. Therefore gaining exposure to cryptocurrencies via an ETF makes accessing this market trend easier and more efficient. Globally, multiple cryptocurrency ETFs have been filed with regulators.

Artificial intelligence (AI): AI is a sector of computer science, which focuses on the advancement of computer and machine learning. Its goal is to teach computers to learn and think with a level of intelligence that is similar to our own. Investing in AI using an ETF can be done in two ways: purchasing an ETF with exposure to companies which invest heavily in AI research and development or purchasing an ETF which uses AI methodology to make investing decisions. Markets have seen both styles of AI investing grow in popularity over the year, with more than 15 North American listings that align with AI investing.

Socially Responsible Investing: Being socially aware of your investments, also known as Environmental, Social and Governance (ESG) investing, has become very popular over the last year. Investors have become increasingly mindful of the types of companies their money is being directed to and are investing accordingly. With an ETF that has an ESG mandate, an investor can screen out stocks from a particular universe that do not support their values.

The path ahead

ETFs deliver efficient access to equities and fixed income across all geographic exposures in addition to low-cost and liquid access to thematic and precise exposures. Investors are becoming increasingly confident in using ETFs and have become more knowledgeable of the advantages and efficiencies of ETF investing. The growth of the ETF market is expected to remain steady, in terms of both an increase in assets and an increase in options, further developing meaningful investment possibilities for investors in 2018.

We expect the ETF industry to increase its growth trajectory, backed by greater adoption across institutional, adviser and retail platforms. We project the global ETF industry to double to more than US$10 trillion over the next five years.

Risk factors

For professional investors only. Past performance should not be seen as an indication of future performance. The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested. Investing in ETFs involves risk, including risks associated with market volatility, currency rate fluctuations, replication strategies, and changes in composition of the underlying index and assets.

Read the full BMO Global Asset Management ETF Outlook 2018 here.

Sources: 1 ETFGI, Dec 2017

Shares are listed on the London Stock Exchange and may be purchased and sold on the exchange through a broker-dealer. Purchasing and selling shares may result in brokerage commissions. Applications for subscriptions directly to the funds may only be made by authorised participants. Shares purchased on the secondary market cannot usually be sold directly back to the Fund. Secondary market investors must buy and sell ETF Shares with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current Net Asset Value per Share when buying ETF Shares and may receive less than the current Net Asset Value per Share when selling them.

Commissions, fees, costs and expenses all may be associated with investments in exchange traded funds. Investment objectives, risk information, fees and expenses and other important information about the funds can be found in the prospectus.

©2018 BMO Global Asset Management. All rights reserved. BMO Global Asset Management is a trading name of F&C Management Limited, which is authorised and regulated by the Financial Conduct Authority.

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