Jan 30, 2015 - Amy Belew
Records are set all of the time… in sports, business and in life. The question is once a record is set, should the focus then be on breaking it again or simply pursuing the strategy that got you there?
As discussed in a previous Blog post, we just finished an incredible record year in the ETF industry, with more than $330 billion in new investments. I recently shared this fact with a group of high school students at a mentoring event and why ETF popularity has skyrocketed. Naturally, a group of sophomores and juniors aren’t really considering ETFs or investing in general, as they’re more curious about how to set a course for college. But planning an investment strategy is very similar to planning a career path―you want to set goals, but you also have to be flexible when life throws you a curve.
ETFs can help you do just that. And as more investors discover their benefits, the industry is growing rapidly. While it’s anyone’s guess whether there will be another broken record a year from now, I’m confident that ETFs will continue to gain traction around the globe.
The Role of Flexibility in 2015
Financial markets started the year with several challenges, including increased volatility in markets and currency. ETFs can help you navigate the choppy waters in a variety of ways, two of which I will highlight here.
First, we believe smart beta will continue to grow. The category has quadrupled in the past five years, pulling in over $65 billion in assets in 2014. As my colleague Sara Shores writes, smart beta combines elements of active and passive strategies to accommodate unique investment opportunities. I see two types of smart beta that can potentially help strengthen investor portfolios in 2015:
1. Minimum volatility. These funds could see more demand as investors try to reduce risk during turbulent periods. For an investor, they give exposure to a key index but through targeted holdings, seeking to reduce risk and decrease the market’s peaks and valleys.
2. Single Factor funds. These ETFs are well positioned to gain further traction as fund providers tilt exposures by selecting securities based on specific characteristics or fundamentals such as size, value or quality, or by seeking to mitigate currency risk A couple of examples include the newly launched iShares MSCI International Developed Quality Factor ETF (IQLT) and the iShares MSCI International Developed Momentum Factor ETF (IMTM).
The second area of focus will be on where investors can look for yield. Global fixed income ETFs saw record flows of $84.5 billion last year, an increase of 24% over 2013. While the demand for fixed income ETFs may soften if U.S. interest rates rise as expected, bonds play an important, and continual, role in long-term portfolios. Individuals, financial advisors, banks and insurance companies have increasingly adopted this strategy. We expect to see this pace to continue throughout 2015.
Last will be navigating the currency fluctuations as this will be a key theme this year if the U.S. dollar continues to strengthen against the yen and euro, as expected. Specifically, these funds offer investors exposure to key markets while seeking to reduce the risk of a drag on returns if the local currency depreciates.
It’s impossible to predict whether 2015 will be another record year for ETFs. But with strategies specially designed to help investors of all sizes navigate today’s volatile and divergent markets, I won’t be surprised if more investors see how versatile they really are.
Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting the iShares ETF and BlackRock Mutual Fund prospectus pages. Read the prospectus carefully before investing.
Investing involves risk, including possible loss of principal. Minimum volatility fund(s) may experience more than minimum volatility as there is no guarantee that the underlying index’s strategy of seeking to lower volatility will be successful. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets or in concentrations of single countries.
Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.
The currency hedged funds’ use of derivatives may reduce the funds’ returns and/or increase volatility and subject the funds to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. The funds could suffer losses related to its derivative positions because of a possible lack of liquidity in the secondary market and as a result of unanticipated market movements, which losses are potentially unlimited. There can be no assurance that the Fund’s hedging transactions will be effective.
Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes than the general securities market.
The iShares Funds are not sponsored, endorsed, issued, sold or promoted by MSCI Inc., nor does this company make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with MSCI Inc.
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 Bloomberg as of 12/31/2014
 Bloomberg, BlackRock as of 12/31/2014
 Bloomberg as of 12/31/2014