16 Bold ETF Predictions for 2016
2015 wasn’t exactly a great year for fund investors. A few choice companies dominated and left their competitors in the dust, making it a pretty poor year to be a sector investor. For example, stocks like Amazon (AMZN) or Netflix (NFLX) more than doubled in 2015 while not a single major SPDR sector looks to finish the year with gains in excess of 11%.
However, 2016 looks to be a bit brighter, assuming of course it isn’t going to be a ‘stock picker’s market’ again in the New Year. Beyond that though, it looks to be another exciting and prosperous year for the ETF industry, and one that looks to see plenty of changes, as well as new funds. In terms of what specifically the New Year might hold, I offer up 16 predictions on what I think 2016 will hold for the world of ETFs, and what investors need to watch for in the New Year:
Hedged currency trend finally ends
One of the most annoying trends in 2015 has been the surge in every type of hedged currency ETF you could think of, be it half hedged, dynamic hedged, or Chinese currency hedged. While I think the dollar will strengthen a bit more, I think the second half of 2016 will see the flow of hedged ETFs slow to a trickle—if not an outright halt—as the dollar levels out and investors look elsewhere for gains in foreign markets (see Flurry of New Currency Hedged ETFs Fuels Price War ).
ETMFs Debut, but stumble out of the gate
Exchange Traded Mutual Funds are going to be a big buzzword in 2016 as companies like Eaton Vance look to launch this product type which seeks to provide the exchange-traded benefits of ETFs, with the closed-off holdings aspects of mutual funds to prevent front-running. While I think these will one day have a place in the fund world, they will stumble out of the gate as they confuse investors, unless of course big name players jump on this category and can bring their brand name following with them.
More specialized sectors funds look to catch fire, but struggle
After the insane rise of the cybersecurity ETF (HACK – ETF report) in the past year, a number of ETF issuers are looking to strike it rich with similar products in the New Year. As of late, I have seen filings for e-commerce funds, 3D Printing ETFs, and an Internet of Things product, with all of them looking to catch fire like HACK did. However, HACK had a massive catalyst, and without that, the new funds will struggle for a bit to gain popularity in 2016 (see Invest in Booming Technologies with These 3 ETFs).
IWM will beat SPY in 2016
Large caps led the way in 2015, mostly thanks to incredible performances from well-known companies. I think this trend reverses in 2016 and we see a return of the small cap ETF (IWM – ETF report) and its outperformance over its large cap counterparts in the New Year.
RSP will beat SPY in 2016
In that same vein, the equal weight S&P 500 fund (RSP – ETF report) had long beaten its cap-focused counterpart, (SPY – ETF report). However, this trend ended in 2015 thanks to those surging mega cap securities. I am also looking for this trend to reverse in 2016 and to see a resurgence of equal weight product demand in general for the New Year as well.
Surge in duration hedged/negative duration ETF interest
A few years ago, hedged Japan ETFs (like DXJ) hit the market and many thought they were too sophisticated for retail investors. However, as this turned out to be the best way to play the Japan story, investors of all stripes flocked to these products, making them ultra-popular choices in the Japan market. The same concerns are present now with hedged/negative duration bond funds and I think as interest rates rise these will have their time in the sun (by being the best bond ETF plays) and surge in popularity in 2016 ( Worried About Higher Interest Rates? Buy These 4 ETFs to Profit ).
Ex-sector funds hit $ 100 million under management
If 2016 is anything like 2015, we will see at least one major sector stumble. That is why I think the lineup from ProShares of ex-sector ETFs (ex-energy, ex-financials, ex-health care, and ex-technology) will finally surge in 2016 after languishing in anonymity for much of Q4 in 2015. With a year under their belt, these will finally see some interest from investors and will go from a combined AUM of under $ 20 million today, to a combined AUM of at least $ 100 million by year’s end.
New SPDR Select Sector ETFs hit $ 100 million in assets
State Street’s SPDR lineup has proven to be very popular, but the company recently launched two new products to round out its financial ETF offering; (XLFS – ETF report) (focus on financial services) and XLRE (focus on real estate). Both of these made their debut in Q4 but haven’t really seen a surge in assets. I think this will change in 2016 as the interest rate picture becomes clearer, making at least one of them a $ 100 million product, up from roughly $ 16 million total right now.
Oil-free in 2016
The trend against oil investing will continue in 2016 and I think we will see at least a few more fossil-free funds hit the market as investors look to avoid this space in their portfolios. I also think we could see an oil-free bond ETF (or fossil free bond ETF) as issuers look to cash in on the trend against oil investments and over the concerns of defaults in the high yield market in this corner of the fixed income world (read Support the Environment and Profit with Fossil Fuel Free ETFs ).
ETF Closures Go Over 100 and Hit/Approach a Record
There are nearly 20 funds that have less than $ 1 million in assets under management, while about 300 have less than $ 5 million under management. There is basically no way these are profitable and I am sure we will see a host of closures in 2016 as the writing on the wall becomes clear for many of these strategies. This will make 2016 another big, if not the biggest, year for ETF closures on record.
Someone Will Close Down Too Early
The flip side of this is that a fund will close down too early. In 2016, I predict a fund will shut its doors only to see its segment go on to great popularity within the next few months. We saw this with FAA and the airline space (among others) and it is hard to discount the importance of timing in the ETF world right now, so look for this to happen to a country or sector fund in the New Year (see Finally a New Airline ETF Prepares to Take Off).
Two similar ETFs will launch within a one month window
You know when Hollywood launches two similar movies pretty close together (White House Down and Olympus Has Fallen or A Bug’s Life and Antz back in the day)? Well, the ETF industry likes to do that too, putting out funds that target pretty much the same area within a few weeks of each other. The idea is to dilute the first-mover advantage (or to race and become the first mover) and I’d look for that trend to continue in 2016 at least once.
Wearable ETF hits the market (or at least a filing)
Thanks to the ubiquitous nature of Fitbit (FIT – Analyst Report) and a boost in interest in all technology connected devices that are ‘wearable’, a number of companies are jumping into this market. As we saw in recent months with cyber security and cloud computing ETFs, I’d expect to see a wearable (ticker WEAR?) before too long, or at least a filing that will get this fund to market eventually.
Bitcoin fund finally comes out
For quite some time now, there has been a filing in the pipeline for a bitcoin ETF (COIN) from the Winklevoss twins of all people. The first filing was in 2013, an index was launched earlier in 2014, and I think 2016 will finally mark see this idea pass regulatory hurdles as well as the launch of this product which should help to make bitcoins more easily tradable and liquid for the masses, much like what GLD did for gold (read Believe It or Not: Winklevoss Bitcoin ETF on the Horizon ).
Price war continues
As the ETF space starts to round out, many ETF issuers have launched ‘me-too’ products which target substantially similar segments of the market. The way they differentiate has largely been on the price front and this has forced issuers to slash costs in order to remain competitive. This war has been great for consumers who look to save more money, and I expect to see more fee cuts and price competitive products in 2016 as well.
You’ll see more calls of an ETF Bubble… These will be wrong
Every couple of months, ETF pundits will write articles or go on TV saying that the end is near for the ETF world and that the category cannot support more products. These predictions have been wrong before and they will be wrong again in 2016. While there are a lot more ETFs than there were a few years ago, there is still plenty of more sector specific and active ETF opportunities out there, meaning that investors shouldn’t be worried about a bubble again in the New Year either (see Best and Worst ETFs of 2015).
Happy New Year and best of luck to fund investors in 2016!
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