After a wild 2016, what's in store for the markets this year?
I am betting that things will calm down a bit, though some surprises are definitely in store once again. After all, a new administration, coupled with political uncertainty will definitely introduce volatility into the market at some point, while the Fed and numerous geopolitical problems loom large on the horizon too.
Still, it is always fun to make predictions on how the year will come to pass, and especially if you had a solid run last year. For the 2016 edition, I offered up several predictions for how the ETF industry might fare over the year, and I've got to say, most of them were pretty spot on. Sure, there were some wrong decisions, like the rise of ex-sector funds, but a few looked to be pretty good calls for 2016, including the launch of the WEAR ETF (BATS:WEAR) (barely squeaked by with this one!), as well as calls regarding the Real Estate Select Sector SPDR ETF (NYSEARCA:XLRE) and the Guggenheim S&P 500 Equal Weight ETF (NYSEARCA:RSP) for the year (you can see the full list in the 16 ETF predictions for 2016).
I am hoping for a similar prediction performance this year and have outlined 10 predictions for what I see happening in the ETF industry over the course of 2017. Most are industry-related, but performance definitely plays a role in most of the predictions too. Check them out below.
People finally understand the perils of ESG ETFs/Someone does it right
Kind of a head-scratcher for me in 2016 was the widespread proliferation of Environmental, Social, Governance (or ESG for short) funds on the year. While I don't think there is anything wrong with the approach, the execution has been pretty poor, and people seem to be blind to what is actually in these funds.
For example, a recent ESG fund launched, the iShares MSCI USA ESG Optimized ETF (NASDAQ:ESGU), includes companies like Exxon Mobil (NYSE:XOM) (not exactly an environmentalist favorite), Goldman Sachs (NYSE:GS) (probably not a model of ethical behavior, according to some), and Raytheon (NYSE:RTN) (the world's largest maker of cruise missiles) in their holdings. Are those the kind of companies investors are looking for when they are trying to invest with a conscience?
I think investors will wake up to this at some point in 2017 and someone will do it right. By that I mean we will get a much more concentrated fund that levels out many of the questionable picks that I have highlighted above, and it will get some market recognition for this too.
SNSR Hits $50 million in assets under management
Niche ETFs have had mixed success in the ETF world, as some have managed to take off and post solid levels of assets - such as the PureFunds ISE Cyber Security ETF (NYSEARCA:HACK) - while others - such as some of the generational-focused funds that recently made their debuts - have faltered. But I think the Global X Internet of Things Thematic ETF (NASDAQ:SNSR) will fall into the first category, as this looks to be one of the hottest and most in-focus segments of the year.
The space really started to take off to close out 2016, and it really is just scratching the surface of its potential. And as more people buy smart home products (the Amazon Alexa (NASDAQ:AMZN) was sold out briefly for Amazon this holiday season online), the sector will only grow all the more, and especially as the industrial side takes off too.
I'd look for this ETF to see a huge asset increase before 2017 is over, and reach the critical $50 million mark as more investors embrace this industry for quality exposure this year. Check out the recent podcast we did on this topic for additional information on the Internet of Things world:
"Smart Beta" trend goes to bond world
One of the biggest trends over the last few years in the equity ETF world has been the concept of "smart beta". This idea looks to weight securities by a factor other than market cap, usually a fundamental factor of some sort such as book value, revenues, dividends, or the like.
This approach has proven to be extremely popular in the equity world, but it really hasn't transferred over to bonds just yet. I think this is the year that changes, and especially as bond managers look to gain a new edge in this corner of the market, so look for at least a few bond ETFs to feature some "smart beta"-themed launching this year.
Rise Back to Fame for TTAC
AdvisorShares Wilshire Buyback ETF (NYSEARCA:TTFS) was a popular ETF and a personal favorite and portfolio holding of mine for several years. I really liked the methodology, but a shocking development happened in 2016 - the management team was thrown out, and a slightly different approach was put in instead.
The folks at TrimTabs - who were behind the original TTFS - were forced to go out on their own and apply their Float Shrink methodology to a new fund. This product is cheaper than its former iteration, but it still employs the same strategy. I think investors will "come back home" to this fund in 2017 and the TrimTabs Float Shrink ETF (BATS:TTAC) will make a big comeback in assets. For more on this topic, check out my recent podcast below:
Bond ETFs fall out of top 10 in assets under management
As interest rates continue to rise or at least stay at these "elevated" levels, I think investors will begin to see losses on the bond portions of their statements, and I think many will either move to equities or dump bonds and go to bank holdings and CDs.
Many are likely to wonder why the risk of bonds is worth it in a rising rate world, and especially after a nice multi-decade run. Due to this, I think the sole bond ETF in the top ten biggest fund list, the iShares Core Total U.S. Bond Market ETF (NYSEARCA:AGG), will drop out of the top tier before 2016 is over, to be replaced with a different asset class-focused fund instead.
Low-duration/negative-duration ETFs finally take off
I thought that 2016 was going to be the year for low and negative duration funds, but I am going to repeat that call again this year. Now that we actually have higher rates, the usefulness of these products is being seen by many in the finance world, making these potentially solid choices for investors seeking to retain some level of bond exposure in a rising rate environment.
So, I'd look for a breakout from this group in 2017, and especially if recent trends continue, potentially putting several in this space on the road to $100 million in assets under management. For more on this concept, check out the recent podcast I did with the leadership for the Sit Rising Rate ETF (NYSEARCA:RISE) below:
AIRR hits $250 million in assets under management
With the election of Donald Trump, a number of once-forgotten sectors received a big boost. One that is at the top of the list, and appears to be on the radar for Trump to start 2017 too, is the world of manufacturing.
This segment could benefit from plans to bring back production to the U.S., while a strong dollar will likely help small- and mid-cap companies (which tend to do more business domestically) more than most. That is why I am looking for the First Trust RBA American Industrial Renaissance ETF (NASDAQ:AIRR) to not only have a solid year, but to become a market darling as well.
AIRR's focus on companies which make goods here in the U.S., as well as community banks in areas which are home to manufacturing centers, makes it one of the best possible ETFs to benefit if Trump has any luck enacting some of his trade policies. I am calling it the "Make America Great Again" ETF, and I think this is its year to shine and become a much more well-known fund.
IBB falls from second in list of most popular healthcare ETFs
One area that could definitely be hurt by Trump is the world of biotechnology. I think most investors are discounting this possibility, but just wait until one of these companies moves to raise prices and feels the full weight of the "Bully Tweetdeck" upon them.
But there are warning signs for the biotech world beyond Trump, as the number of drug discoveries is on the decline once again. With fewer blockbuster drugs and higher regulatory risk, I don't think there is a lot to like about this market from a broad-based look. I think this is going to be a space where more specialized areas pick up some steam, and investors look beyond the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) for their exposure in the healthcare/biotech market. One that appears promising is the Loncar Cancer Immunotherapy ETF (NASDAQ:CNCR), which focuses on the world of immunotherapy. Check out my podcast with the creator of the Loncar Cancer Immunotherapy Index for some insights into this market segment:
Specialized financial ETFs make a run
Those of you in the ETF investor service know we made an excellent run in the financial ETF space, largely thanks to our bet on the regional bank fund, the SPDR S&P Regional Banking ETF (NYSEARCA:KRE). This space looks to be among the biggest winners from a higher rate environment, and stocks in this area of the financial world took off as a result.
I don't think this is a one-off situation either, as investors will start to gravitate towards the more differentiated financial ETFs in order to achieve exposure that is more in line with their goals. And with some of the solid performances over the past few months in this market, it is going to be an easy sell in 2017.
In particular, I have my eye on the community bank fund First Trust Nasdaq ABA Community Bank ETF (NASDAQ:QABA) and the broker dealer fund iShares U.S. Broker-Dealers & Securities Exchanges ETF (NYSEARCA:IAI). Both of these should do well this year if the current rate environment continues, and at least move up the charts and gain some ground on the gold standard in the market, the Financial Select Sector SPDR ETF (NYSEARCA:XLF).
USCF Launches a 3x Crude Oil ETF hits $250 million in assets in six months after launching
One of the biggest surprises of the end of 2016 was the shuttering of UWTI and DWTI, two oil ETNs which offered 3x and -3x exposure, respectively, to crude oil. The duo were pretty popular products, but it looks as if the issuer wanted to get these debt instruments off of its balance sheet, shuttering them despite being solid performers.
This left investors and issuers scrambling, but I think it is just a matter of time until we see a replacement. Already, USCF is planning on launching a 3x Crude Oil ETF, and I think it will prove to be extremely popular, and particularly if the volatility in the oil market continues.
Happy New Year. Let's hope 2017 is another great year for the world of ETFs!