IndexIQ top trends and insights for 2019
A new ETF Rule from the SEC, continued inflows into alternative strategies, and a robust M&A market will all be among the key trends to emerge in the New Year, according to ETF pioneer IndexIQ.
1. 2019 will bring a more level playing field to the ETF industry, and innovative fixed income approaches may follow
Next year will likely bring the implementation of the SEC’s long-awaited ETF Rule, which is designed to lower some of the barriers to entry for new issuers and new products. While much of the “white space” in the equity ETF realm has already been filled, fixed income remains an area ripe for innovation, and some provisions of the rule, such as more allowances for the use of “custom baskets,” could open the door for new types of fixed income ETF approaches to be brought to market, which would not have been feasible under the old approach. We’ve been adding to our fixed income ETF suite in recent years and will continue to put a great deal of emphasis into researching new and useful strategies that could be of use to investors through the ETF wrapper.
2. Inflows into alternative strategies will continue
Q4 has so far seen an increase of inflows into alternative ETF strategies, and we expect this trend to accelerate in 2019 as investors look for ways to mitigate some of the volatility that has been a major component of the 2018 market story, while also keeping some of the gains they’ve accumulated across their portfolios in recent years. As the firm that pioneered the liquid alternatives category, we’ve seen this space grow and mature since we brought out our first alternative ETF (QAI) almost a decade ago.
3. Merger activity, though off its highs from a few years ago, will continue to be strong
As mentioned above, in 2018 investors have clearly taken notice of what a merger arbitrage strategy can bring to their respective portfolios. While 2018 saw a continued deceleration in merger activity, a trend we expect to see continue in 2019, deal volume, relative to historical levels, is still very strong, and deal completion rates remain strong as well. Our research has also shown that historically, merger arbitrage returns tend to be positively correlated to short-term interest rates, something that could be very compelling to investors in the current climate.
4. Value may finally reclaim the lead over growth, but investors may be well-served by diversified, multi-factor approaches
For the first two months of Q4 2018, we’ve seen growth and value effectively flip positions with regard to how each is performing among all of the major factors. Froth in the “FAANG” stocks has dissipated, and tech sector momentum appears to have broken. Is this enough to call for a value rebound after value approaches have spent several years in the doldrums? Very possible. We think we’ll see a return to the historic pattern of relative performance characteristics of the various factors in 2019, further making the case for investment approaches that take a diversified, multi-factor view of the markets.
5. Navigating the fixed income market will require a more dynamic approach as we keep an eye on interest rates, credit spreads, and corporate bond downgrades
- Does the Fed tighten 1, 2 or 3 times in 2019? With one more interest rate increase virtually certain in late 2018, all eyes are on Fed Chair Powell to see how they wind down the interest rate normalization cycle. If they continue with 2-3 moves in the Fed Funds rate, the economy may show signs of weakness, especially as the impact of fiscal stimulus (i.e. tax cuts) is showing signs of wearing off.
- Do credit spreads widen out again due to lower oil prices or late cycle concerns? With oil moving sharply lower in late 2018, we saw a concurrent increase in credit spreads, negatively impacting high yield bond prices. If oil prices stay low on increased supply from Russia and Saudi Arabia, will credit spreads further widen? Or, if the Fed is too aggressive with interest rate normalization, will credit spreads expand?
- Will there be large downgrades of BBB investment grade corporate bonds into BB or lower junk bonds? The BBB investment grade bond universe is currently ~$2.7T vs ~$1.2T for the entire high yield bond universe. If we see a large shift in bonds from BBB to BB or lower, there could be implications for passive high yield funds.
Past performance is no guarantee of future results, which may vary. 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.
This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.
The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.
This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.
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