ETFs More Popular Than Ever, Low-Risk In Demand

An interesting development is the fast growth in low risk ETFs. This category aims to offer downward protection, but without giving up the upside movements in stock prices. iShares offers the MSCI USA Minimum Volatility (symbol: USMV) and PowerShares the S&P500 Low Volatility (symbol: SPLV) as an example. There are several variations within the low risk category, some feature currency hedging, use VIX futures to lower the negative effects of volatility, but also defensive equities or a high dividend strategy could be considered. During the last 12 months, low risk ETFs saw a net inflow of $9.6 billion. According to DB, on a relative basis this was 6 times larger than conventional ETFs. DB tracks 43 ETFs within the low risk category. For the record, above mentioned low risk ETFs outperformed the broader market with a 2015 yield of 4.7% (USMV) and 3.3% (SPLV), compared to 2.2% for SPY.

The battle between active and passive is shifting further in favor of passive. Until October 2015, mutual funds (active) saw outflows of $16 billion. This doesn’t come as a surprise since a lot of media attention is going to ETFs these days. Furthermore, the continuous launch of new ETFs, for instance in the smart-beta category, gives investors a lot more choice. Deutsche Bank reports that smart-beta raised $63 billion in cash since the beginning of 2015. Nevertheless, with $16 trillion in asset, the mutual fund industry is still significantly larger.

At bottom line, the success story of ETFs is continuing and seems stronger than ever. But before the category will grow ahead of the actively managed mutual fund industry, it will take some more years with impressive growth. Smart investors probably made the switch already.