2016: Top 5 ETF Trends

It's been another great year for European exchange-traded funds (ETFs) as their main selling points - low cost and transparency - appeal to increasingly savvy investors. What are the top ETF trends for issuers and investors alike to keep an eye out for in 2016?

IFAs Wise Up To ETFs

European retail investors haven't embraced ETFs with quite as much gusto as 'mom and pop' investors in the U.S., but independent financial advisers are increasingly recognising their advantages for the smaller investor. Last month, a survey by ETF provider Source found that IFAs want to see ETFs more readily available on investment platforms – 82 percent wanted greater access to ETFs while almost a third were in favour of an increase in the number of available products.

ETF trading consultant Laurent Kssis is convinced that this trend is set to continue into 2016. At a recent IFA presentation he observed that many were pushing their clients towards ETFs.

"IFAs are starting slowly to embrace ETFs purely because of costs [and] moving away from mutual funds... clients are asking for [ETFs] more and more."

Smart Beta Price War

The concept of smart beta is growing in popularity with investors - research house ETFGI reported record inflows of $53.7 billion into smart beta equity ETFs from January to October this year. The time is ripe for a mini price war in smart beta products, predicts Alan Miller, co-founder of discretionary fund manager SCM Private.

"There's a large number of ETFs chasing a relatively small pot of money, and the charges of quite a lot of those are quite high. Plain vanilla [ETFs] have come down almost as much as they can, smart beta has quite a long way to go.

"Whilst it is growing, the number of product launches is growing much faster than demand. Something has to give - the overall cost needs to come down to reflect the fact that smart beta isn't a golden lottery ticket."

He boldly predicts average charges falling 50 percent or more over the next 12 months.

Fossil Fuel-Free ETFs

The number of socially responsible investment mandates are rising, as the problem of global warming becomes ever more pressing. Decarbonisation was top of the agenda at this month's United Nations Climate Change Conference in Paris.

Carbon-free versions of major indices are going to be big business, predicts Eric Balchunas, senior ETF analyst at Bloomberg, as investors seek exposure to mainstream indices, minus the polluting stocks. These strategies appeal to a wider range of investors, because they offer exposure to major blue-chip stocks that are less volatile than many of those found in pure clean energy indexes.

This month, State Street Global Advisors launched the S&P 500 Fossil Fuel Free ETF (SPYX), which tracks the performance of a fossil fuel-free version of the S&P 500.

"[They're a] game changer. The whole idea of trying to green up your portfolio is a big deal for younger people. These indexes look almost identical, you get [to have] your cake and eat it too," said Balchunas.

Hedged Products: Here To Stay

Currency-hedged products have invaded the ETF world, as investors demand products to minimize the impact of fluctuating currencies on their returns. This year, Blackrock announced plans to introduce flexible currency-hedged ETFs so that investors can dial up or down the level of their hedging, depending on how volatile currency markets are.

Balchunas said: "Currency-hedged ETFs are probably around for the long term, in terms of being a major area of ETFs."

Francois Millet, head of ETF and index product development, also believes these kinds of products are here to stay, and that we will see more sophisticated hedging products. Furthermore, now that the U.S. Federal Reserve has finally increased interest rates for the first time since 2006, investors are going to seek out interest-rate hedged products.

"An interest rate-hedged strategy makes sense because when interest rates go up, the price of bonds go down," said Millet.

Brazil - The Olympics Effect

Brazil, once the darling of emerging market investors, has been struggling for some time now. The decline in commodities prices, its weakening real currency and a series of political scandals have cast a long shadow. The iShares MSCI Brazil Capped ETF has performed poorly - year-to-date returns are down almost 40 percent. But 2016 heralds the Rio Olympics, which may provide Brazil with a much-needed boost and an opportunity for ETF investors, said Kssis. The London 2012 Olympics was said to have boosted the UK economy by £9.9 billion.

"Investors should keep an eye on Brazil, two to three months prior to the Olympics. ETFs are good products for exposure to Brazil and the real."