Top 5 ETF trends to watch

July 19, 2022 12:55 PM

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A lot has changed since the first exchange-traded fund appeared on the wealth management landscape more than 30 years ago.

The earliest funds passively tracked market indexes. Today, a new breed of actively managed funds has less transparency and a hands-on approach for their investment managers. Meanwhile, the costs and risks of “free” model portfolios are under scrutiny, and the recent liquidation of a notable socially conscious ETF has both advisors and investors re-evaluating how to incorporate the products in retirement portfolios.

Scroll down for more on these stories and other key developments that are reshaping the ETF landscape.

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ETFs are hands-off investments? Think again

ETFs have long been popular with investors for their ability to offer exposure to the market by passively tracking a specific benchmark or theme. It’s not uncommon for the funds to make up as much as 52% of an investment portfolio, according to financial services data firm Broadridge Financial Solutions.

“Most people can’t really deal with the volatility” of investing in mutual funds or directly in stocks, said chief investment strategist Lance Roberts of RIA Advisors. “ETFs extract out some of the emotionality.”

But passive ETFs are no longer the only game in town, as funds emerge with portfolio managers actively selecting stocks in a specific theme or sector. These active ETFs often lack transparency, so both investors and advisors need to be more hands-on as well.

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ETFs are hands-off investments? Think again

Asset manager models use ETFs with higher prices, lower returns: study

“Free” model portfolios may allow advisors to spend less time on investment management and more time on financial planning. But expenses, performance and conflicts of interest should be considered, according to researchers.

Asset managers recommend ETFs that they're affiliated with more often than they do funds that they’re not tied to, even though the latter have lower fees and better performance, according to a recent study from the University of Utah, the Norwegian School of Economics and Shanghai University of Finance and Economics.

“Simply grabbing a free model and walking away from it assuming ‘it is in good hands’ is a disservice to clients,” said advisor Kashif Ahmed of American Private Wealth. “A little cynicism would be warranted and beneficial here.”

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Asset manager models use ETFs with higher prices, lower returns: study

An LGBTQ equality fund’s liquidation and the future of social criteria

High-profile board members Martina Navratilova and Barney Frank were not enough to prevent LGBTQ Loyalty Holdings' LGBTQ + ESG100 ETF from being liquidated after less than one year in a challenging market.

The fund joins the ranks of several ETFs that have been closed so far this year, highlighting the difficulties advisors and their ESG-focused clients face when seeking to align portfolios with socially conscious investing.

To be sure, some startup ETFs with social or political roots have fared well, including Adasina Social Justice All Cap Global ETF and Invest Vegan. For financial planner Lindsey Young of Quiet Wealth, success in LGBTQ investing lies in finding what she called “ETFs with methodology that’s more focused on companies that perform best on social metrics specifically.”

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An LGBTQ equality fund’s liquidation and the future of social criteria

Rise in thematic ETFs comes with high fees, more risk, study says

Thematic ETFs that focus on specific sectors such as technology or energy have grown in popularity, with assets under management reaching $806 billion globally at year-end 2021.

But a new study from the EU Business School indicates that actively managed thematic ETFs have higher fees, higher tracking errors, lower liquidity and lower diversification, making them riskier investments compared with traditional passive funds.

“Risk-averse savers should be wary of financial advisors who recommend thematic ETFs,” said the author of the study, Lorenzo F. P. Merlo. “Retirement plans should rely on a risk-averse long-term investment strategy.”

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Rise in thematic ETFs comes with high fees, more risk, study says

Tesla among first single-stock ETFs, with Nike, PayPal maybe coming soon

For years, single-stock ETFs have been big business in Europe. Now the first of these controversial investments has cropped up in the United States.

AXS Investments is launching eight exchange-traded funds that allow investors to make inverse or leveraged bets on single companies. The first will be a bearish bet on Tesla, with other ETFs for PayPal, Nike and other companies expected soon.

Single-stock ETFs use leveraged or inverse trades to amplify gains, but their volatility means that they can also magnify losses. The SEC has strongly criticized the investments, with Chairman Gary Gensler calling them “a particular risk.” The products are not meant to be for long-term investors, but rather for day traders.

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Tesla among first single-stock ETFs, with Nike, PayPal maybe coming soon