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ETF Trends For 2016: Part 2, Robo-Advisors

In part 1 of this series we reviewed the growth of the ETF market in 2015 and introduced the series by covering currency hedged products. In part 2, we are going to take a brief look at a well-covered topic that could have a huge impact on the way ETFs are utilized: Robo-Advisors Robo-Advisors & The Rise Of The Machine In the last few years investors have not only embraced ETFs but the ways by which they manage their ETF investments. Robo-Advisors are, according to Investopedia: Online wealth management services that provide automated, algorithm-based portfolio management advice without the use of human financial planners. While older, wealthy investors have traditionally been wary of putting their money in non-human hands and valued human guidance, younger clients are more and more frequently selecting robo-advisors. According to a recent Spectrum study : 17% of investors 35 and younger and 11% of those ages 36-44 currently use a robo-adviser, compared with 6% of those 45-54, 4% of those 55-64 and 4% of those 65 and older. Younger investors are, as a rule, more willing to shift where their money is invested and try new technologies. If one platform doesn’t work out, they won’t waste time to see if the company improves next year, and there are more than enough platforms to try something different. Firms like Betterment and Wealthfront have exploded on this relatively new scene, with over $3 billion and $2 billion in AUM, respectively. However, well established financial firms like Schwab (NYSE: SCHW ), BlackRock (NYSE: BLK ), Fidelity and Vanguard have all seen the benefits of creating their own robo-platforms as a new source for revenue. After attending the 20th Annual IMN Global Indexing and ETFs conference in Scottsdale this December, Josh Brown of Ritholtz Wealth Management summarized the audience’s feelings on robo-advisors: The crowd here is very curious about how to implement the technology; there isn’t any concern about the B2C robos as competitors. The prevailing feeling is that their AUM growth has already peaked while Vanguard and Schwab have stolen their thunder. While the conference audience, mostly made up of RIAs and financials advisors, might think this market has reached its peak, market research data tends to disagree. Below is the expected growth in AUM by robo-advisors from consulting firm A.T. Kearney, as reported by Bloomberg . Click to enlarge Clearly, this is a trend to watch in the coming years, but what will it mean to ETF investors and issuers? During an interview with FinancialPlanning.com, Dodd Kittsley, head of ETF strategy and national accounts at Deutsche Asset & Wealth Management of Deutsche Bank (NYSE: DB ), stated the following when asked how robo-advisors affect ETFs: It really opens an avenue to a different investor base. I think certainly that’s going to be a continued catalyst for growth in the industry. For these robo-advisors, certainly much of their objective is to deliver strategic allocation models for long-term investors; and ETFs, when you think about it, are the purest way to execute on an asset allocation strategy. If you just finished this piece and find yourself wondering if robo-advisors are for you, I would refer you to David Fabian ‘s advice from 2014, when robos were just starting to gain traction in the market: At the end of the day, each investor considering a robo-advisor over a traditional asset manager should compare the cost savings with any additional value-added services that may be offered. In addition, an asset manager may have a unique philosophy that aligns more closely with your own method of investing. This can lead to peace of mind when choosing a third party to be the steward of your hard-earned nest egg. Robo-advisors lower the barriers to entry that existed in financial markets, much like online trading platforms opened up markets for part-time trading. As with part-time trading, this is not a one-fits-all solution, but another tool for investors to consider. As someone who watches the development of the ETF market for a living, I see robo-advisors as another gateway for exposing a new generation of investors to ETFs, significantly strengthening ETFs’ position as the fund vehicle of choice in the market. Stay tuned for part 3 next week, which will focus on the ETF fee war and concluding thoughts for the ETF industry trends in 2016.

Lipper U.S. Weekly Fund Flows: A Tale Of 2 Cities

By Tom Roseen During the fund-flows week ended January 27, 2016, markets continued their wild swings upon hearing conflicting market and economic news throughout the week. On Thursday, January 21, U.S. stocks got a shot in the arm, fueled by a rally in oil prices, despite news that crude inventories had risen the prior week, that weekly initial jobless claims had risen to their highest level since July, and that the Philadelphia Federal Reserve Bank’s manufacturing index remained in negative territory for the fifth month in a row. Hints of more stimuli by the European Central Bank and news that China’s central bank had injected more cash into the country’s financial system helped markets gain some footing. On Friday all three major U.S. indices posted their first week of plus-side returns for 2016 after oil prices rose to their highest levels in nearly two weeks and after a report showed that North American oil rigs’ output had declined slightly. Market participants cheered news that preliminary readings of the purchasing managers’ index were on the rise and that December existing-home sales rose a whopping 14.7%. Unfortunately, another major rout in oil prices weighed heavily on the markets on the following Monday, sending the Dow Jones Industrial Average down by triple digits as investors began to look for clues on the Fed’s outlook after the FOMC meeting adjourned on Wednesday. Nonetheless, U.S. markets rose once again after witnessing another rebound in oil prices and after learning about strong earnings reports from bellwether firms Sprint (NYSE: S ), P&G (NYSE: PG ), and 3M (NYSE: MMM ). The U.S. market shrugged off another round of large declines in China’s Shanghai Composite and cheered news that November U.S. home prices rose at their fastest pace in 16 months and that January’s consumer confidence index beat expectations. Despite the Fed leaving rates unchanged after its January FOMC meeting, some investors worried that it had left the door open for a March interest rate increase, even though it acknowledged that economic growth had slowed. That led the U.S. markets to suffer yet another round of declines on Wednesday. A rise in oil and news that new home sales had rebounded in December weren’t enough to push the markets higher. While investors were net purchasers of fund assets (including those of conventional funds and exchange-traded funds [ETFs]), injecting a net $16.6 billion for the fund-flows week ended January 27, the headline numbers were a little misleading. As might be expected, given the recent volatility, investors turned their backs on equity funds, redeeming $1.2 billion net for the week, but they padded the coffers of money market funds (+$13.9 billion), taxable bond funds (+$3.3 billion), and municipal bond funds (+$0.6 billion). For the first week in four equity ETFs witnessed net inflows, taking in $3.9 billion. Despite concerns over the FOMC announcement, authorized participants (APs) were net purchasers of domestic equity ETFs (+$3.8 billion), injecting money into that group also for the first week in four. They also padded-for the first week in three-the coffers of nondomestic equity ETFs (but only to the tune of +$107 million). Perhaps as a result of the strengthening oil prices and better-than-expected earnings news from stalwart U.S. firms, APs turned their attention to some big-name ETFs, with the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) (+$3.5 billion), the iShares Russell 2000 ETF (NYSEARCA: IWM ) (+$2.7 billion), and the iShares MSCI Japan ETF (NYSEARCA: EWJ ) (+$0.7 billion) attracting the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum the iShares Russell 1000 Growth ETF (NYSEARCA: IWF ) (-$0.7 billion) experienced the largest net redemptions, while the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) (-$0.5 billion) suffered the second largest redemptions for the week. For the seventh week in a row APs padded the coffers of government/Treasury funds, injecting $3.7 billion for the week, their largest net inflows since February 4, 2015. Once again, in contrast to equity ETF investors, for the fourth week in a row conventional fund (ex-ETF) investors were net redeemers of equity funds, redeeming $5.1 billion from the group. Domestic equity funds, handing back $4.9 billion, witnessed their twelfth consecutive week of net outflows, despite posting a weekly return of 1.35%. Meanwhile, their nondomestic equity fund counterparts witnessed $0.2 billion of net outflows-suffering net redemptions for the first week in three. On the domestic side investors lightened up on large-cap funds and equity income funds, redeeming a net $2.3 billion and $1.0 billion, respectively, for the week. On the nondomestic side global equity funds witnessed $1.2 billion of net outflows, while international equity funds attracted some $1.0 billion. For the twelfth consecutive week taxable bond funds (ex-ETFs) witnessed net outflows, handing back a little over $2.6 billion for the week. Corporate investment-grade debt funds suffered the largest redemptions for the week, witnessing net outflows of $2.1 billion (for their tenth consecutive week of net redemptions), while corporate high-yield funds witnessed the second largest net redemptions (-$0.7 million). Despite the Fed’s leaving the door open for a March rate hike, bank rate funds-handing back some $0.7 billion for the week-experienced their twenty-seventh consecutive week of net outflows. In a flight to safety investors injected net new money into government mortgage funds (+$0.6 billion), government/Treasury and mortgage funds (+$0.4 billion), and government/Treasury funds (+$0.1 billion) for the week. For the seventeenth week in a row municipal bond funds (ex-ETFs) witnessed net inflows, taking in $502 million this past week.

New Energy Fund Seeks To Capitalize On Sector Dislocations

The North American energy landscape is changing rapidly, as the shale boom that led to record production and U.S. inventory levels is being followed by a Middle East oil conflict that is driving oil prices vastly lower. In response, OppenheimerFunds has launched the Oppenheimer SteelPath Panoramic Fund, which is designed to capitalize on the industry tumult with a long-term, value-oriented approach to investing in all “links” in the North American energy value chain. “We are investing in companies that are best positioned to gain long-term advantage from these shifts and deliver relative performance across different commodity price scenarios,” said Brian Watson, CFA and Director of Research at Oppenheimer SteelPath, as well as Senior Portfolio Manager for the fund, in a statement. “Our long-term investment view allows us to benefit from expected dislocations in the evolving global energy market.” Targeting More Volatility, Better Returns Mr. Watson also said he thinks the Oppenheimer SteelPath Panoramic Fund will have more volatility than the firm’s other midstream energy-focused funds, but he also expected it to generate better returns. That’s because the fund attempts to identify value by focusing strictly on small- and mid-cap companies, which tend to be more volatile, over large-cap international oil-and-gas juggernauts. In Mr. Watson’s view, this approach should allow the fund’s investors to best benefit from the “U.S. energy revolution.” “The North American energy landscape has transformed, creating a generational shift in relative competitive advantage as well as new opportunities across the entire energy value chain,” said OppenheimerFunds CIO Krishna Memani. “Brian and his team are using their extensive knowledge of the energy sector to identify durable investment opportunities for our clients.” The energy “value chain” includes: “Upstream” companies that explore for and produce oil, natural gas, and other hydrocarbons; “Midstream” companies that gather, transport, store, distribute, or market energy products; and “Downstream” companies that process, treat, or refine hydrocarbons. Total Return Focus The Oppenheimer SteelPath Panoramic Fund, which went live on November 18 of last year, will invest in all three links of this chain, as well as other energy beneficiaries – chemicals and materials manufacturers, engineering and production companies, etc., – that stand to benefit from energy-related activities. The new fund’s stated objective is to provide total return. Its shares are available in A (MUTF: EESAX ), C (MUTF: EESCX ), R (MUTF: EESRX ), Y (MUTF: EESYX ), and I (MUTF: EESIX ) classes, with respective net-expense ratios of 1.55%, 2.30%, 1.80%, 1.30%, and 1.10%. The minimum initial investment for Class I shares is $5 million – the minimum for all other classes is $1,000. For more information, visit the fund’s web page .