Inflation, disruption and activism – the big themes for 2018

by , 3rd January 2018

It’s that time of year when pundits like me get our crystal balls out. Clearly, no one can predict the future (or if they can, they’re sitting on a beach in the Bahamas right now enjoying the spoils, rather than writing prediction pieces). For me, the real value in forecasts – both making them yourself and reading those of others – is in honing your own thought processes and highlighting where the biggest threats and opportunities might appear in the year ahead. So with that disclaimer in mind, what do I think 2018 might hold for the ETF world?

The end of the great bond bull market

One of the biggest themes for the year ahead will be inflation – is it going to make a comeback, or continue to be conspicuous by its absence? My feeling is that with unemployment rates at or near record lows in most developed countries, and growth picking up strongly, this year may well see investors start to take the threat of inflation more seriously, even if a full-blown return to the 1970s still seems a way off. In turn, that means that 2018 could finally be the year that definitively marks the end of the 35-year-or-so great bond bull market (put very simply, inflation is like kryptonite for bonds).

In terms of what this means for ETFs, one side-effect is a likely burst of interest in ETFs that offer holders short exposure to bonds . Of course, that also means plenty of scope for mis-steps as investors more used to equities buy inverse bond ETFs without fully understanding a) how daily rebalancing works or b) what the underlying indices actually track.

The commodities comeback

Increased fear of inflation will also boost the appeal of commodity-related ETFs. As ‘real’ assets, commodities are among the few asset classes that thrive during periods of inflation. During the super cycle of the early 2000s, interest in commodities as a separate asset class boomed, but the long and brutal bear market that kicked off in 2011 has all but put paid to that as a concept (rightly, I’d argue – though that’s another article altogether).

However, given that commodities are among the very few assets out there that could still be considered reasonable value compared to bonds or equities, and that investors will be keen to find sectors that can play “catch-up”, it seems a fair bet that commodity indices will be increasingly popular with investors this year. Indeed, as we enter 2018, the Bloomberg Spot Commodity Index is enjoying one of its longest winning streaks on record. If inflation fears do take off then precious metal ETFs and related mining indices are likely to enjoy particular attention.

The big tech themes

Tech in general had a strong 2017, and many individual themes did particularly well. For example, the hype over electric vehicles and battery storage in general meant that lithium-related ETFs had a great year in 2017 (lithium is the key component in much of today’s technology) and that may continue in 2018. However, with several big themes – from blockchain to quantum computing to cybersecurity – garnering attention as we enter 2018, it’s hard to stay on top of them all. Hence a new ETF launch in the US at the tail end of last year – the ALPS Disruptive Technologies ETF. Confused as to which industry will be turned upside down by tech next? This ETF saves you the bother of figuring it out by giving you exposure to all of them – ten themes to be precise, including internet of things, cloud computing and robotics and artificial intelligence. Expect to see more launches in this vein before we move into the inevitable ‘disappointment’ phase of the tech hype cycle.

ETF providers turn activists

As far as the ETF industry goes, there’ll be plenty of areas to watch, including the ongoing evolution of smart beta. But one area I find particularly interesting is the question of corporate governance. ESG (environmental, social and governance) investing is becoming increasingly high profile, but we’re not just thinking about green or explicitly ethical issues here. As the active fund management industry continues to come under pressure as money shifts towards cheaper passive strategies, and governments come under more pressure to do something about grotesque executive pay packages, the spotlight is going to fall on the big passive investors and how they can best use their influence as shareholders. Taking a more active stance on governance is one way for big ETF providers to differentiate themselves from the competition and to attract investors who want to put their money to work, but also want to ensure that the companies they invest in are held to account. We’re already seeing signs of this happening, but I’d expect 2018 to be the year that we see some of the big ETF providers really stick their heads above the parapet on corporate governance, and pay in particular.