Dave Nadig's 2018 Bold ETF Predictions

December 19, 2017

It’s that time of year—the time when market prognosticators, sports enthusiasts and political pundits start making impossible-to-verify predictions about what the coming year will bring. In the spirit of that, here are a few of my bold and not-so-bold predictions for 2018.

1. Some fairly boring smart-beta stars are born

I’m not in the market-prediction business, but I can’t help but feel like the broad equity markets are … frothy. I’m not talking about a giant market crash or anything, I just look at the chart of the S&P 500 and it looks pretty unrelentingly “up and to the right.” Even things like the CAPE ratio are looking hard to ignore (and sure, I know all the counterarguments).

So what happens if there’s a real pullback? Well, we know that, short term, anything that’s got a low beta will all of a sudden start racking up nice relative performance numbers. Who knows who the precise winner might be, but the general characteristics are probably:

  • Funds that have been around at least three years, and even better, five
  • Funds that are pretty “marketlike” but still with a consistent beta below 1.
  • Funds that generally stay well-diversified by design

To me, that list includes funds like the iShares Edge MSCI USA Quality Factor ETF (QUAL), or even something like the Guggenheim Defensive Equity ETF (DEF). Many smart-beta newcomers are actually pretty high-beta plays, so the prevailing logic that they’ll all do great seems misguided to me. (You can check out the beta of any ETF versus a neutral benchmark on the FIT tab of our fund pages.)

2. It’s not the big resurgence of active

It’s pretty simple, really. In a big downturn, some decent chunk of active managers will outperform, if for no other reason than they’ve been sitting on cash when an “event” occurred.

But we have numbers that tell us just how well they did. Longtime readers will know I’m a big fan of the S&P Index vs. Active report (SPIVA), which measures “what percent of managers were beaten by their benchmarks.” Here’s what the report said at the end of 2008:

     “The belief that bear markets favor active management is a myth. A majority of active funds in eight of the nine domestic equity style boxes were outperformed by indices in the negative markets of 2008. The bear market of 2000 to 2002 showed similar outcomes.” 

And here’s the data to prove it:

 

Source: Standard & Poor’s Indices Versus Active Funds Scorecard 2008

 

So, I just don’t buy it.

 

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