3 ETF Predictions For The 4th Quarter

September 02, 2014

With four months left to a crazy year, here are three ETF surprises in store.

We love making predictions around here. After all, Matt Hougan and I predicted in February that the ETF market was going to cross $15 trillion by 2024. Maybe it’s because we’re not in the business of making market calls. Or maybe it’s just that nobody can resist reading tea leaves when it comes to investing, no matter how academic the approach.

Matt and I recently chatted about what we thought the big stories for ETFs were going to be in the fourth quarter of 2014. Here’s what we came up with:

1) ETF assets will cross $2 trillion

With assets currently sitting at around $1.9 trillion, this seems like a bit of a no-brainer. Flows haven’t come in a straight line this year by any means, and investors seem to be capricious regarding where they’re allocating. All signs, however, seem to point toward a traditional end-of-year pop for ETF flows to add to the $103 billion that has flowed in so far this year.

One of the traditional sources of flows is tax-loss harvesting, something that may be less relevant to mutual fund investors this year. It’s been a good year in general across most asset classes, with just a few pockets of actual negative performance. According to Morningstar, the average Europe fund is down a few percent, as are funds focused on small-cap growth. But almost every traditional equity category is at least positive for the year.

But, importantly, there are trillions of assets in active funds that have underperformed this year.

According to Morningstar, the average large-cap growth fund is up just over 7 percent year to-date, versus 9.4 percent for the S&P 500 Index. In fact, not a single category of U.S. equity funds has beaten the S&P 500 so far this year.

Of course, some individual funds did: You might have been lucky enough to be in the Snow Capital Focused Value mutual fund (SFOIX), and been up more than 16 percent. But you paid 1.15 percent to get there, and if you just wanted an aggressive take on value, you could have bought the Global X SuperDividend ETF (DIV | B-37), which returned almost 18 percent, at less than half the price.

The point is this: Investors are continuing to realize that they’re overpaying for underperformance in actively managed mutual funds, and eventually, that money finds a home in ETFs.

Could the market correct and drop asset levels? Of course.

But barring the kind of panic being called for by David Tice, I think we’re on target for $2 trillion by year end.


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