2013 was a great year for the ETF industry, thanks to strong flows in equity funds, a host of new launches, and demand for low cost products. Due to these trends, assets under management for the total industry crossed the $1.6 trillion level, while the total number of funds surpassed the 1,500 mark.
And 2014 is shaping up to be a solid year too, as many investors remain reasonably bullish on the economy, while Europe is also surging back. Assuming that the QE taper doesn’t impact the economy too much, there is plenty of reason to think that stocks can march a bit higher this year as well.
Yet even with this solid backdrop, the ETF industry could be in for some surprises this year. There are plenty of untapped markets out there, while there are at least a few dozen funds that have failed to capture investors’ interest on the other side of the coin.
Given this, it could be a rocky year for some issuers, though others seem well positioned to take advantage of the market trends. In particular though, we look for the following five predictions to come true for the ETF industry, and dominate the news cycle this year:
New Income ETFs Dry Up
Despite the taper threat, new income ETFs continued to hit the market. A plethora of new products with an income focus launched in 2013, giving investors a variety of options to target income-investments be they in the form of covered-calls, dividend growth, or dividend quality.
While these have been welcomed additions to many investor portfolios, you have to wonder how many more the market can hold. We have already seen a few launched from First Trust in 2014, and I am skeptical that the market will be able to stomach too many more (read 3 Best Dividend ETFs of 2013).
For example, in just the last two months of 2013, investors saw several ETFs hit the market with an income focus. These include a variety of strategies such as theCambria Foreign Shareholder Yield ETF (FYLD), the Horizons S&P Financial Select Sector Covered Call ETF (HFIN), and the ETRACS Monthly Pay 2xLEveraged Closed-End Fund ETN (CEFL), just to name a few.
Bottom Line: The intense flow of income ETFs slows to a trickle, especially as competition heats up and rates continue to rise.
Emerging Markets Rebound
Although flows into equity products were pretty intense for U.S.-focused funds, emerging markets saw heavy outflows. (EEM) and (VWO), the two most popular emerging market funds on the market, were the biggest losers in terms of assets with each losing more than $8 billion. Other emerging market funds also led the list of the biggest outflows as concerns over the taper, a strong dollar, and growth prospects hampered these securities.
However, many of these emerging markets have stabilized in recent trading, and with strength projected in key markets like China, they could be due for a rebound. Plus, with developed markets performing so well, it could lead to some serious strength for exporters in the developing world.
Bottom Line: Emerging Market ETFs will see a rebound, and solid inflows for 2014.