When one year ends and another begins, people love to look back at the previous 12 months and acknowledge the best and worst of the period. The Oscars, the Grammies, and the Darwin Awards play to this common desire to reflect on the achievements and failures of the past year, as do various financial-industry awards and lists. But the New Year is also a time to look ahead, and that's the direction IndexIQ chooses to fix its gaze in anticipation of the top five ETF trends for 2016:
- Hedge fund strategies
- Commodities bottom
- Dynamic ETF innovation
IndexIQ believes the divergent economic policies of global central banks will fuel currency-hedging in 2016. The U.S. Federal Reserve recently raised interest rates for the first time in almost a decade, while the European Central Bank ("ECB") and the Bank of Japan ("BOJ") remain committed to "easy money" policies - the BOJ, in fact, recently pushed Japanese rates into negative territory.
Currency-hedging can offset these monetary moves and thereby isolate the performance of underlying assets, irrespective of currency strength. Given the widely diverging policies of the world's leading monetary authorities, many international investors will choose to hedge their bets.
After years of unprecedented monetary expansion, central banks are complaining of low "inflation." By this, of course, they mean "price inflation," as measured by a gauge such as the consumer price index ("CPI"). But there's an argument that the monetary expansion over the past several years did cause inflation - in asset prices - and that it must eventually trickle down into consumer goods. IndexIQ says that "if history is any guide," prices are hard to contain once inflationary pressures start to push them higher - and that could happen in 2016.
Hedge Fund Strategies
These same dynamics are making alternative strategies - such as those pursued by hedge funds - more attractive. Alternative strategies are designed to have low correlation to traditional assets like stocks and bonds, and given the wild currency movements and potential for price inflation, stocks and bonds may have a difficult year.
Alternative strategies, however, can take advantage of currency trends as well as investing in inflation-hedged assets like precious metals, real estate, and Treasury Inflation Protected Securities ("TIPS"). Hedge funds and other alternatives can also capitalize on Trend #4: commodities bottoming.
Although the firm admits it's a "tough call," IndexIQ believes 2016 may finally be the year that commodities hit rock-bottom and begin to mean-revert higher. Monetary easing in Japan and China may finally give life to oil, copper, and other reeling markets. Inflation could also be a factor pushing them higher, especially when denominated in currencies other than the U.S. greenback.
Dynamic ETF Innovation
These are "ETF trends," of course, and IndexIQ's "dynamic" ETFs are designed to take advantage of them. The continued "innovation" of so-called "dynamic" ETFs is another trend all on its own, with products built to help manage domestic and international equity volatility, interest rate risk, and the impact of currencies on investors' portfolios.
"The slowdown in China, an unsettled geopolitical situation, the ongoing impact of currency devaluations on growth and trade, and a pending U.S. election suggest that investors will be grappling with increased market volatility in 2016," said IndexIQ CEO Adam Patti, in a recent statement. "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."
Jason Seagraves contributed to this article.