In 2018, there were more than 200 exchange-traded funds brought to market. What’s in store for this growing space in 2019?
Several industry leaders weighed in on different trends — from regulations to factors — that they see as important for 2019 in the ETF space.
1. SEC’s ETF Rule
Next year will likely bring the implementation of the Securities and Exchange Commission’s long-awaited ETF rule, which is intended to lower some of the barriers to entry for new issuers and new products.
Under current rules, wannabe ETF issuers must get SEC permission — a process known as exemptive relief.
The SEC proposed in June a plan to allow many ETFs to come to market without first obtaining exemptive relief from the Investment Company Act of 1940 — a plan that updates and attempts to streamline 26 years of ETF approvals by the agency through hundreds of exemptive orders. The comment period for this proposal ended at the beginning of October.
According to IndexIQ, the rule will bring a more level playing field to the ETF industry. The ETF provider also thinks the rule could allow for more innovative fixed income approaches.
“Some provisions of the rule, such as more allowances for the use of ‘custom baskets,’ could open the door for new types of fixed income ETF approaches brought to market, which would not have been feasible under the old approach,” IndexIQ said in a statement.
Active Non-transparent ETFs
Multiple asset management firms have filed applications with the SEC for exemptive relief that would allow them to actively manage funds under a non-transparent product structure, according to an ALPS white paper exploring these structures. According to this paper, just two of these non-transparent structures — Eaton Vance’s NextShares and one from Vanguard — have gained SEC approval to date.
However, Natixis — one of the asset managers that has filed with the SEC — thinks more active non-transparent ETFs will move through the SEC review process in 2019.
Natixis filed its exemptive relief application in January 2018 (and an amended application in June) in conjunction with the New York Stock Exchange. The two institutions are presenting an actively managed ETF model currently called Periodically Disclosed Active ETFs (NYSE PDA).
“Freeing active ETFs from having to disclose their holdings daily has the potential to level the playing field within ETFs, allowing more active fund managers to launch ETFs alongside the more passive investment strategies currently available in the marketplace,” Natixis said in a statement.
Currently, all active ETFs in the U.S. need to disclose their holdings daily, which Natixis believes has dissuaded many asset managers who focus on active investment management from launching ETFs.
3. Low-Volatility and Quality Factors
iShares’ Dan Draper looks at what trends could impact factor performance in his 2019 outlook.
According to Draper, corporate profit growth in 2019 will face the headwind of difficult year-over-year comparisons to 2018. Draper expects the impact of the Trump tax cut to dissipate, monetary tightening to continue, the inventory cycle to turn less constructive for output, and the lagged effect of dollar strength to eat into profitability.
In addition, he notes that rising labor costs and buoyant diesel prices have worked to squeeze profit margins already.
Because of this, Draper expects that a loss of profit momentum in 2019 could lead to increased volatility and correlations. He also expects that the Federal Reserve’s rate increases over the past few years could exacerbate volatility.
“Given this view, we believe that the low-volatility and quality factors may perform relatively well in such an environment,” according to Draper. “Additionally, as we move later into the cycle, we would expect the spread between growth and value to narrow, and we believe a factor combination of value/momentum may shine under those conditions.”
4. Alternative ETFs
IndexIQ expects inflows into alternative strategies will continue into 2019.
“Q4 has so far seen an increase of inflows into alternative ETF strategies and we expect this trend to accelerate in 2019 as investors look for ways to mitigate some of the volatility that has been a major component of the 2018 market story while also keeping some of the gains they’ve accumulated across their portfolios in recent years,” the ETF provider said in a statement.
— Related on ThinkAdvisor: