2018 Mid-year ETF trends update
Never a dull moment
Whatever else can be said about the first half of 2018, one thing for sure is it hasn’t been dull. Tax reform, trade disputes, currency fluctuations, and the Federal Reserve’s ongoing tightening program have combined to create the proverbial “wall of worry” for investors.
So what’s next? It seems unlikely that the staccato-like pace of events will slow down anytime soon. Start with interest rates. The Fed has announced a second tightening, moving the target range to 1.75-2.00%. They also indicated that as many as two more tightenings may be in store for the second half of the year. Recent economic news, in particular strong retail sales, will do nothing to discourage this upward momentum.
So there’s good and not so good news for fixed income investors. The not so good news is that rising rates generally means lower prices for bonds; the good news is that interest income can be reinvested at the higher levels, generating additional income going forward. In addition, a momentum-based approach to bonds can help investors move towards those sectors demonstrating the highest potential returns.
M&A has continued strong, as we expected with the just-approved AT&T / Time Warner deal highlighting the interest in transformative, multi-billion dollar transactions. Merger-related investment strategies have continued to attract investors and M&A appears to have sufficient momentum to continue to flourish through the balance of the years, providing the economy continues to expand and the cost of money stays reasonable.
Currencies have done what currencies often do: they’ve confounded the experts. The dollar has rallied, showing surprising strength; the Euro has bounced around based in part on internal politics (such as the Italian elections); and emerging markets have generally taken a hit. Predicting here is easy – currency movements will remain unpredictable.
The ETF industry, meanwhile, keeps rolling along, attracting an additional $94.7 billion in assets through May 10, 2018.1 New products, new ideas, new asset classes, and smart beta funds continue to drive growth. As more and more investors discover the benefits of ETFs as a core part of their portfolio, we would expect this trend to continue (albeit with the occasional set back in terms of fund flows).
Finally, we have noted the “punch first, ask questions later” style of the current administration. Some commentators have suggested that this might moderate over time, but so far there’s not a lot of evidence to support that view, as the recent North Korea gambit and the China tariffs demonstrate.
Regardless of the source, the return of volatility to the equity market isn’t really surprising, coming off of last year’s record lows. That being the case, it might not be a bad time to consider some alternative exposure in the form of a multi strategy hedge fund exposure or a single strategy like M&A, which can serve to smooth out the bumps.
For fans of non-stop action, these days are a dream come true. Investors, who value a little more predictability, might be fine with dialing back the drama a little and letting the earnings and economic data speak for themselves. That, however, seems unlikely.
1. Source: Bloomberg, as of June 2018.
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