Despite stocks plunging and high volatility in the market, 2020 has also seen continued growth within the exchange traded fund (ETF) market. The top five issuers of ETFs alone each have $100 billion or more in assets under management (AUM). In addition to overall growth, there have been other new developments and trends in the ETF market thus far in 2020.
- Despite stocks plunging and high volatility in the market, 2020 has also seen continued growth within the exchange traded fund (ETF) market.
- Compared to individual bonds, fixed income ETFs provided lower transaction costs, in addition to liquidity and continuous price transparency for investors.
- Cannabis ETFs were all the rage in 2019 and after another year of meteoric gains, cannabis ETFs are poised to experience additional fast growth—and improved performance.
The Impact of Volatility
Despite the ups and downs, the ETF market has seen stable growth over the past year with fixed income ETFs benefitting from investor fears. A key source of growth within the ETF market, the popularity of these ETFs signals a positive trend for the year ahead.
Compared to individual bonds, fixed income ETFs provided lower transaction costs, in addition to liquidity and continuous price transparency for investors.
The ability to purchase bonds through an exchange by purchasing ETFs provides greater ease for investors—the legacy marketplace for bonds remains difficult for even institutional investors to navigate—and allows them to navigate price dislocations when they occur.
Pension funds, insurance companies, and asset managers have also adopted fixed income ETFs—but at scale. This means that these large investors have regularly taken positions sized in the billions of dollars.
In just one year, fixed income ETFs grew by 30%—in June 2020, global fixed income ETF assets accounted for $1.3 trillion. Blackrock has even projected that global fixed income ETFs assets will reach $2 trillion by 2024.
Actively Managed ETFs
Between the global pandemic and economic recession caused by the novel COVID-19 virus and the American presidential election, 2020 has been consistently marked by uncertainty and volatility. At the same time, active investing has captured the attention of many investors for several different reasons.
First, these funds employ various skills and attributes—top-down approach, bottom-up approach, value investing, growth investing, absolute returns strategy. Second, investors have the flexibility to shift their allocations and positions in response to the market. Finally, active funds generally outperform the benchmark index. It is true that active funds are more expensive, but covering the additional costs of compensation for the fund manager's research and due diligence can be worthwhile in illiquid or inefficient markets.
Cannabis ETFs were all the rage in 2019 and after another year of meteoric gains, cannabis ETFs are poised to experience additional fast growth— and improved performance. As these ETFs become more established, performance is expected to improve. And with the cannabis industry continuing to grow in popularity, even more growth is expected over the next year.
Cannabis ETFs provide investors with exposure to companies that engage in the cultivation, distribution, and sale of marijuana and related products. Although it is still an illegal substance in many parts of the world, as legalization continues to rise, so does the popularity of products ranging from dried flowers and oils to seeds and edibles. In 2020, cannabis is a multibillion dollar industry: ETFs allow more investors to profit from the overall growth in this industry.
Sometimes, fear can be profitable, and there were some opportunities created by COVID-19. Some ETFs and exchange traded notes that track the VIX index have seen great success since the beginning of the year.
The VIX is the Chicago Board Options Exchange (CBOE)’s volatility index; it's also referred to as the fear index. Although the VIX is linked to the CBOE, it's also tied to the volatility of many different types of assets from different exchanges.
The VIX shot up to nearly 83 (out of 100) in mid-March. For those funds tied to the VIX, the greatest profits were gained by those who invested in these funds before the start of the pandemic. The mass sale of assets in March in the midst of a high level of uncertainty is the reason why many of them experienced an increase in asset prices.
With less uncertainty about government-ordered quarantines, what measures the governments was going to take to support the populace, and what kind of government restrictions would be enforced, the stock market has recovered. It is important to note that funds that are tied to the VIX (or that may have been affected positively by the pandemic) are likely not going to be a particularly profitable investment in the future.
Continued ETF Growth
With increased volatility on the horizon, ETFs will likely continue to attract investors.
Over the past year, the ETF market has experienced significant growth and increased. And with the “ETF Rule” in 2019 simplifying the process of introducing new ETFs, those trends are likely to be even more prominent in the future. As we look to the year ahead, it’s important to remember that focusing on the big picture can help investors look beyond market swings and make the right decisions for their investing needs.