Every year, we write about trends to expect for smart beta. Factor-based strategies and smart beta ETFs have been growing in popularity with investors, leading us to wonder what new twists we could see in 2018.
1. Momentum may share the spotlight with value
The momentum factor had a strong year in 2017, with the MSCI USA Momentum Index rising 37.8%. But performance for individual factors is cyclical, and there can be several inflection points within a calendar year (in fact, we refresh our forward-looking views monthly). We still think momentum has further room to run, but we have also improved our outlook on value in the U.S., where valuations are attractive and wage growth may drive interest rates higher. Globally, where inflation is expected to be more benign and valuations are less attractive, we currently have a neutral view on value.
2. Multifactor can gain popularity
Investors are increasingly recognizing the potential diversification benefits of deliberate exposure to complementary factors through multifactor strategies. Assets in multifactor smart beta ETFs grew by more than $20 billion in 2017, according to BlackRock, and we expect that growth trend will continue. Staying diversified across style factors is an important consideration, given the historically cyclical nature of their outperformance relative to the overall broader market. For extra credit, U.S. investors may want to look outside their borders and consider a global multifactor fund as well.
3. Fixed income is a slow (but forward moving!) train
Fixed income smart beta funds, much like winter, are coming. We believe there are many opportunities for factor investing to seek improved diversification and a better return for cost trade off in fixed income. My colleague Matt Tucker wrote about the journey for fixed income factors recently and explained that BlackRock launched two style factor indexes in 2017 using quality and value factor insights. It's still early days for factors in fixed income - it may not be the trend that dominates for 2018, but it's an area of future growth potential we remain excited about.
4. Active, passive and smart beta can be complementary
Investors are growing increasingly smart (pun intended!) about how they add smart beta to their portfolios, often complementing both active and passive strategies. The trend for 2018 may not be just investing thoughtfully in factors as discrete smart beta positions, but putting factors to work within other types of funds. This could mean putting retirement savings into target date funds powered by smart beta, balancing style factor exposures across equity funds, or using smart beta ETFs to refresh style box holdings.
5. Taxes always matter
Some people are wondering if they should change their investment strategies in response to the new tax rules. While investors will want to consult a tax professional about their personal situation, I want to remind readers that ETFs are generally quite tax-efficient investments, and iShares smart beta ETFs have been no exception. The distribution history for BlackRock's smart beta ETFs can be found at ishares.com.
I'm excited about the opportunities ahead in 2018 for smart beta and for markets in general.
This post originally appeared on the BlackRock Blog.