2017 ETF Trends and Insights: Mid-Year Update

by: , Chief Investment Officer and Managing Director | IndexIQ

With 2017 now more than half over, the team at IndexIQ took a look at how its “Top Trends & Insights” for the year have fared so far:

1. Volatility is likely to rise.

Several factors in the U.S and abroad set the stage for what we believe will be an increase in volatility in 2017, making it important for investors to diversify across investment strategies and consider approaches designed to provide downside protection.

Mid-Year Status: Emerging Trend

Overall, volatility has remained surprisingly low, with the VIX Index now 13% below its level at the beginning of the year. However, it has not always been smooth sailing. There have been bouts of sharp rises in volatility, accompanied with equity market drops on several occasions. In the majority of these events, an alternative strategy, such as Merger Arbitrage, has provided meaningful downside mitigation.1

2. Divergent Central Bank policies will introduce even more uncertainty around currency moves.

The U.S. Federal Reserve is clearly about to embark on a tightening path, while at the same time, the European Central Bank, Bank of England, and Bank of Japan are still pursuing their easing policies. Predicting currency moves will continue to be a losing game for investors in 2017 and maintaining at least a partial currency hedge in an international-equity portfolio could help mitigate some volatility and risk.

Mid-Year Status: On Target

While the U.S. has embarked on a path of monetary tightening as anticipated, Europe and Japan have unexpectedly joined the U.S. on this path. This has caused weakness in the U. S. dollar vs. the euro and the Japanese yen. Investors who were fully hedged based on the expectation of a strengthening dollar were caught with the wrong currency exposure, detracting from strong performance in markets outside of the U.S.

3. Growth of ETF industry assets will continue.

ETFs saw an approximately 14% growth rate in their overall assets this year through mid-August, which was roughly the same rate of growth experienced by the industry over the previous 12 months. That trend is likely to continue, as ETFs have continued to display competitive performance.

Mid-Year Status: On Target

ETFs have continued to outpace active funds both from a performance and asset-gathering standpoint, and assets are up over 16% year-to-date.2 This can be attributed to the continued strong performance of passive ETFs, relative to active funds, and, to a lesser degree, the implementation of the Department of Labor’s Fiduciary Rule. We believe asset growth is expected to remain strong over the balance of the year and beyond.

4. “Smart beta” bond exposures will continue to gain investor acceptance.

Of the 783 ETFs that ETF.com currently classifies as “smart beta,” only 24 come from the fixed-income segment. In a low-yield, low- growth environment, we believe strategies that allow investors to add additional opportunities for growth and income to their portfolios could prove attractive. As with any new category, the key will be education and understanding how various approaches work.

Mid-Year Status: On Target

U.S.-listed fixed-income ETFs brought in nearly $70 billion in AUM during the first half of the year, nearly eclipsing the $92 billion of inflows to the category for all of last year.3 As part of the ETF inflows, “smart beta” or factor-based, fixed-income funds have continued to gain acceptance. For example, the IQ Enhanced Core Plus ETF (AGGP) saw an increase in AUM of 20% in the first half of 2017, as it outperformed the Bloomberg Barclays Aggregate Index. There were also a number of notable product launches including an ETF focused on seeking lower volatility, high yield bonds, as well as another ETF that seeks to use fundamental data to select higher- quality bonds.

5. Investors will continue to shift assets back into commodities.

A diversified approach to commodities should be considered, much the same way an entire portfolio is viewed through the lens of diversification. Over-concentrating in gold and oil, while ignoring other major commodity sub-sectors such as livestock, grains/food/fiber, industrial metals, timber, water, and coal, could mean that investors miss out on potential opportunities for growth and additional non-correlated sources of return.

Mid-Year Status: Emerging Trend

Commodity-related ETFs saw a resurgence in the early part of the year that continued the strong trend from late 2016. Enthusiasm around the potential economic growth from the “Trump Trade” drove many commodities higher and brought asset inflows with it. However, that trade started to reverse, as oil prices slid on increased supply and headwinds for the “Trump Trade.” Other commodities, including grains, saw very strong performance late in 2Q, demonstrating the importance of looking beyond oil and gold.1

1. Morningstar, as of 6/30/17.

2. Bloomberg, as of 6/30/17.

3. Center for Financial Research and Analysis (CFRA), as of 7/13/17.

All investments are subject to market risk, including possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market.

The information and opinions contained herein are for general information use only. IndexIQ does not guarantee their accuracy or completeness, nor does IndexIQ assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are as of the date of this report and are subject to change without notice. Past performance is no guarantee of future results.


About Risk

All investments are subject to market risk and will fluctuate in value. Liquid alternatives are alternative investment strategies that are available through vehicles that provide daily liquidity, such as mutual funds and ETFs. Alternative investments are speculative, entail substantial risk, and are not suitable for all clients. Alternative investments are intended for experienced and sophisticated investors who are willing to bear the high economic risks of the investment. Investments in absolute-return strategies are not intended to outperform stocks and bonds during strong market rallies. Hedge funds and hedge fund of funds can be highly volatile, carry substantial fees, and involve complex tax structures. Investments in these types of funds involve a high degree of risk, including loss of entire capital. Investments in derivatives often involve leverage, which may increase the volatility of the investment and may result in a loss.

As with all investments, there are certain risks of investing in the Funds. The Funds’ shares will change in value, and you could lose money by investing in the Funds. The Funds’ investment performance, because they are fund of funds, depends on the investment performance of the ETPs in which they invest.

AGGP: Securities of issuers based in countries with developing economies (emerging markets) may present market, credit, liquidity, legal, political, and other risks different from, or greater than, the risks of investing in developed foreign countries. Emerging markets are subject to greater market volatility than more developed markets. High yield securities have speculative characteristics and present a greater risk of loss than higher quality debt securities. These securities can also be subject to greater price volatility. As new Funds, there can be no assurance that they will grow to or maintain an economically viable size, in which case, they may experience greater tracking error to their Underlying Indexes than they otherwise would at higher asset levels, or they could ultimately liquidate.

CSML: Stocks of small-cap companies may be subject to greater price volatility, significantly lower trading volumes, temporary illiquidity, cyclical, static, or moderate growth prospects, and greater spreads between their bid and ask prices than stocks of larger companies. Stock prices of small-capitalization companies may be more volatile than those of larger companies and, therefore, the Fund’s share price may be more volatile than those of funds that invest a larger percentage of their assets in stocks issued by mid-or large-capitalization companies. Stock prices of small-capitalization companies are generally more vulnerable than those of mid-or large-capitalization companies to adverse business and economic developments. Securities of small-capitalization companies may be thinly traded, making it difficult for the Fund to buy and sell them. In addition, small-capitalization companies are typically less financially stable than larger, more established companies. The Fund is a new fund. As a new fund, there can be no assurance that it will grow to or maintain an economically viable size, in which case, it may experience greater tracking error to its Underlying Index than it otherwise would at higher asset levels, or it could ultimately liquidate.

HYLV: Investments in foreign securities may be riskier than investments in U.S. securities. Differences, including less stringent investor protections and disclosure standards, less liquid trading markets, and political and economic developments in foreign countries, may affect the value of the Fund’s investments in foreign securities. High yield funds typically invest a substantial portion of assets that are not rated or that are rated at the level of or below BBB, considered high yield by a major ratings agency, such as Standard & Poor’s or Moody’s. Ratings apply to the underlying portfolio of debt securities held by the Fund and are rated by an independent rating agency, such as Standard and Poor’s or Moody’s. If ratings are provided by the rating agencies, but differ, the lower rating will be utilized. If only one rating is provided, the available rating will be utilized. Securities that are unrated by the rating agencies are reflected as such in the breakdown. Unrated securities do not necessarily indicate low quality. S&P rates borrowers on a scale from AAA to D. AAA through BBB represents investment grade, while BB through D represent non-investment grade. As a new fund, there can be no assurance that it will grow to or maintain an economically viable size, in which case, it may experience greater tracking error to its Underlying Index than it otherwise would at higher asset levels, or it could ultimately liquidate.

The CBOE Volatility Index (VIX Index) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.

S&P 500 Index is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ.

The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.

Merger arbitrage involves simultaneously purchasing and selling the stocks of two merging companies to create “riskless” profits and is often considered a hedge fund strategy.

Smart beta defines a set of investment strategies that emphasizes the use of alternative index construction rules to traditional market capitalization-based indices.

Consider the Funds’ investment objectives, risks, and charges and expenses carefully before investing. The prospectus and the statement of additional information include this and other relevant information about the Funds and are available by visiting IQetfs.com or calling 888-934-0777. Read the prospectus carefully before investing.

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs and the principal underwriter of the IQ Hedge Multi-Strategy Plus Fund. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.


Salvatore J. Bruno

Chief Investment Officer and Managing Director | IndexIQ

Sal is Chief Investment Officer at IndexIQ, where his primary responsibility includes developing and maintaining the firm’s investment strategies. Sal joined IndexIQ in 2007 from Deutsche Asset Management (DeAM) where he held a number of senior positions

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