Peruse investing headlines and chances are you’ll see something being reported about exchange-traded funds (ETFs).
Perhaps it’s a profile of a company trying to break into the ETF space, or a new category of ETF gaining traction in the markets.
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Regardless of the angle of the article, there's one main takeaway here: Investors seem to have ETFs on the brain.
According to education and analysis site ETF.com, total U.S. assets invested in ETFs surpassed the $2 trillion mark for the first time at the end of 2014. In 2010, that number was $1 trillion—which means it doubled in four years.
Four years may not seem like a short amount of time, but it is when you compare it to the fact that it took 18 years for ETFs to reach that initial $1 trillion.
Given all of this, you can surmise that growth is happening at a steady clip in the industry, which is why we quizzed finance pros and pundits on what they view are some of the biggest ETF trends taking shape in this corner of the market—trends that could impact your own portfolio.
Trend #1: ETFs Are Giving Mutual Funds a Run for Their, Well, Money
Although the total ETF market is still much smaller than that of the mutual fund, bypassing that $2 trillion mark so quickly “is a great milestone,” says Tom Lydon, president of Irvine, Calif.–based Global Trends Investments and editor of research site ETFtrends.com. “The ramp-up is happening very quickly—compared to something like mutual funds, which took decades [to get to that point].”
And that momentum doesn't seem to be waning: This year marks the first time that ETFs have surpassed mutual funds as the investment of choice for financial advisors in the Financial Planning Association’s annual Trends in Investing Survey.
According to the 2015 survey, 81% of advisors currently use or recommend ETFs with their clients, up from 40% in 2006—and just inching past the 78% who use or recommend mutual funds.
More than half of those polled also said they plan to increase their use of ETFs over the next year, compared to just 23% for mutual funds.
Trend #2: The Street Is Getting Smart to Smart Beta ETFs
The term “smart beta” may sound like it belongs in a science lab instead of on Wall Street—but the concept really isn't as technical as it sounds.
Put simply, smart beta ETFs try to track indexes based on factors outside of the typical measurements used in plain-vanilla stock indexes, like the S&P 500.
For example, a smart beta ETF might seek to track an index of companies whose shares appear to be undervalued in the market (referred to as value ETFs), or it may focus on an index of companies with fewer stock-price swings, known as low-volatility ETFs.
Smart beta ETFs are already fairly pervasive—a 2015 FTSE Russell survey found 68% of U.S. financial advisors who use ETFs have used a smart beta ETF—but as more financial firms try to carve out their own space in the ETF market, investors are likely to see a greater proliferation of smart beta offerings.
According to data from Bloomberg, there's now about $400 billion in assets in smart beta ETFs. “Companies who were not early adopters in offering ETFs have come to the market with their own smart-beta strategies because all of the legacy indexes have been claimed,” Lydon says.
Trend #3: Fixed-Income ETFs Are on the Rise
Although the ETF industry was built on investment in equities, Lydon says, fixed-income ETFs—those that invest in a mix of municipal, corporate or Treasury bonds—are starting to come into their own.
Case in point: In the third quarter of 2015, five of the top 10 ETFs that saw the biggest infusion of investment concentrated on Treasuries and fixed-income ETFs—and received $22 billion of the $44 billion in new money that flowed into ETFs, according to ETF.com.
The rise in popularity of these ETFs could be due to the fact that some investors are still smarting from the recession and looking to dial down the potential risk in their portfolios.
“The bond market has never been as efficient as the stock market with regard to pricing and liquidity,” Lydon explains. “But it’s been making great strides lately not only with improvements in technology and communications, but most important, with the expectation of accurate pricing.”
The rise in popularity of these ETFs could also be due, in part, to the fact that some investors are still smarting from the recession, and are looking to dial down the potential risk in their portfolios, suggests Ed Gjertsen, president of the Financial Planning Association and vice president of Mack Investment Securities, based in Glenview, Ill.
Lydon believes investors also see the inherent appeal that the ETF design brings to fixed-income investing.
Specifically, he's referring to the fact that the shares of an ETF are bought and sold throughout the day on a stock exchange through your brokerage account.
“Although many people invest in fixed-income ETFs for the long term, they also invest in them with the idea that, if at any point in time they want to get out, they can get out at a market price during the [trading] day,” Lydon explains.
Trend #4: ETF Fees Are on the Decline
If you feel like you’ve been paying less to invest in ETFs in recent years, you may just be right.
ETF fees have been dropping, asserts Hougan, who’s seen some ETFs cut their expense ratios in half over the course of the last six years.
A 2015 study of fees by Morningstar found that the expense ratios paid by ETF and mutual fund investors have dropped by 27% in the last 10 years.
And in addition to lower fees, “there’s been a rise in commission-free ETF trading,” Hougan says. He notes that, in the last few years, many of the major brokerages “have made it possible for you to buy certain ETFs without paying a commission.”
Gjertsen chalks up all this fee-trimming to fierce competition in the market.
“When you have companies going toe-to-toe, that creates downward pressure on fees,” he explains. “There’s this fever pitch to try to be the lowest-cost provider.”
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Unless specifically identified as such, the individuals interviewed or otherwise listed in this piece are neither clients, employees nor affiliates of LearnVest Planning Services and the views expressed are their own. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies. LearnVest, Inc., is wholly owned by NM Planning, LLC, a subsidiary of The Northwestern Mutual Life Insurance Company. LearnVest Planning Services does not specifically recommend any particular security product.