2019 Is Shaping Up as the Year of the ETF

From the Baltimore Clubhouse – The bulls are clearly back.

As of this writing, the S&P 500 Index is only 99 points – or just 3% – off its all-time high of 2,931, which it touched last September. If bullish sentiment persists, the index should eclipse that high later this month or next.

Some of the concerns that dragged equity markets down late last year have faded. Those included a potential all-out trade war with China and a Federal Reserve that seemed eager to take away the punch bowl at the height of the party.

Today, the Trump administration sounds like it will probably make nice with our biggest trading partner. And the Fed has clearly capitulated on rate hikes, with expectations of just one more increase in its target rate before the central bank is done for the cycle.

As a result, the market has rallied 21% since Christmas, rising every week but two since then.

And market prognosticators are starting to believe again that the bull market has room to run. Credit Suisse this week raised its year-end forecast for the S&P to 3,025.

And yet, something about this latest rally is different.

This time around, it’s not driven by investors buying individual stocks. In fact, they’re avoiding individual stocks, according to new data from Bank of America Merrill Lynch.

And they’re embracing exchange-traded funds (ETFs)… in a big way.

Some $36.7 billion flowed into U.S.-listed ETFs in one week this month, and ETF inflows for the year so far stand at $54.7 billion.

This seems to be an acceleration in the growth of ETF assets and the number of ETFs that’s been happening for a decade, as you can see in the chart below.

February marked the 61st consecutive month of ETF inflows globally. That helped push global ETF assets above the $5.3 trillion mark for the first time ever.

“At this rate of growth, ETFs will be double the size of the entire hedge fund industry within a few years,” says ETF Strategist Nicholas Vardy.

If this trend continues through the year, it will make 2019 the Year of the ETF.

Interestingly, multifactor ETFs are particularly popular. These are ETFs that allow investors to invest in stocks with a cross section of characteristics like momentum, value, low volatility, etc. – all in one fund. They spread risk much more evenly so when one strategy is flagging, another’s star will be rising.

Investors seem to be embracing the concept. Four of the largest multifactor U.S. equity ETFs have taken in $100 million or more this year. As a group, they’ve garnered some $1.8 billion in new assets.

Reading these numbers, I thought of The Oxford Club’s own investment strategy, which is represented by our Wealth Pyramid. The Pyramid shows Members how to diversify beyond just buying multiple stocks. It entails diversification across multiple asset classes and investment strategies.

We aim for what is called “the efficient frontier” – the absolute best mix of long- and short-term as well as high- and low-risk strategies, with some exposure to each asset class.

All of our products and services fit into this model, offering Members the ability to fully diversify.

By the looks of the ETF flows – and particularly those pouring into multifactor funds – it seems the rest of the investor universe is finally catching on.

Good investing,

Matt

P.S. If you’re interested in getting in on the market’s hottest asset class, check out what ETF Strategist Nicholas Vardy has to say here.