Many leading exchange traded fund providers have enjoyed solid inflow into their equity ETFs as the stock market continues its eight-year bull run.
[ibd-display-video id=2411914 width=50 float=left autostart=true] That begs the question: Is the bull market getting a bit long in the tooth?
No one can answer with certainty when the bull market will end. Yet, that may be just one of many reasons fixed-income funds have been taking over the spotlight in recent months. Still-low interest rates and geopolitical uncertainty are also oft cited by experts.
Regardless of the reason, bond ETF inflow topped $100 billion early last month for the first time in a single calendar year.
VanEck has witnessed firsthand the rush into bonds. The New York-based company, which entered the ETF market in 2006 with VanEck Vectors Gold Miners ( GDX ), now offers more than 50 funds that together cover the stock, fixed income and commodity markets. Van Eck manages north of $41 billion in assets.
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We got in touch with Ed Lopez, head of ETF product management at VanEck, for an update on topics including which strategies have outperformed, his thoughts on bitcoin and where the ETF provider expects growth in the coming year.
“We’ve seen flows into our ETFs across a wide spectrum of asset classes,” Lopez told IBD. “Many associate us with our gold ETFs, such as VanEck Vectors Junior Gold Miners ( GDXJ ) which has seen over $1.0 billion of inflows year to date, but the more interesting stories are on the fixed-income side.”
The full interview with Lopez follows:
IBD: Which of VanEck’s ETFs/strategies have attracted the most assets and inflow this year – and why?
Lopez: Institutional and asset-allocator adoption of VanEck Vectors J.P. Morgan EM Local Currency Bond ( EMLC ) has helped it attract over $1.7 billion of net new assets year to date. Our municipal bond ETFs, with offerings across the credit and maturity spectrum, have gathered over $600 million of net flows this year. Much of that was driven by VanEck Vectors High-Yield Municipal Index ( HYD ), which has benefited from a combination of continuing investor demand for yield, relative value to taxable corporate high-yield bonds, and performance driven by supply and demand imbalance in the muni market.
IBD: You just launched VanEck Vectors NDR CMG Long/Flat Allocation ( LFEQ ). How can it help investors manage risk in the U.S. stock market?
Lopez: The U.S. equity market is in the midst of one of the longest equity bull runs ever, eight years and counting. As an investor you may feel apprehensive about equity investments, even if you know you need them for the long term. Or, alternatively, you may be one of the bulls with bountiful optimism for the near term. Still, many of us have experienced two major market declines of 40% or greater in just the last 17 years and those big nasty downturns can take years to recover from.
We launched VanEck Vectors NDR CMG Long/Flat Allocation to help investors get the equity exposure they need while seeking to avoid major loses. Its underlying index follows a proprietary model developed by Ned Davis Research that measures the health of the market, industry by industry, and determines when, and by how much, to allocate between S&P 500 exposure and cash. It will step in and out of the market for you.
IBD: We last spoke with you in January. What has changed at VanEck since then?
Lopez: When we last spoke, we highlighted a potential rotation to equities. The ETF industry has seen strong flows and performance from the equity markets this year. In our own lineup, we’ve seen some of the strongest returns in international stocks. VanEck Vectors Morningstar International Moat (MOTI) for instance, has outperformed broad international indices, driven in large part by stock selection of Asia and eurozone companies. While equities have had a strong year, flows to taxable fixed income have continued to be robust. In March, we launched VanEck Vectors Green Bond (GRNB), the first U.S.-listed fixed-income ETF to provide targeted exposure to the fast-growing green-bonds market. (Green bonds’ proceeds are used to fund environmentally friendly projects.) Green bond issuance this year totaled approximately $90 billion, as of Oct. 18, surpassing 2016 totals. To meet the climate objectives under the Paris Agreement, substantial infrastructure investment is needed and green bonds are expected to play a big role.
IBD: VanEck Vectors Morningstar Wide Moat (MOAT) and VanEck Vectors Fallen Angel High Yield Bond (ANGL) marked their fifth anniversaries in April. Both funds are near all-time highs. Are there any particular market drivers for their respective YTD gains?
Lopez: Generally, both funds benefit from the common drivers of quality and valuation. VanEck Vectors Morningstar Wide Moat, as a U.S. equity strategy, has been driven by strong contributions from the health care, consumer discretionary and information technology sectors. The real driver of ongoing long-term performance continues to be the stock selection process employed by Morningstar for the ETF’s underlying index. Every quarter, selections are updated to ensure the index has exposure to companies with strong competitive advantages and that are trading at attractive relative prices, according to Morningstar’s equity research team.
VanEck Vectors Fallen Angel High Yield Bond has seen a large volume of fallen angel entrants since the 2014 oil price collapse and the ETF’s exposure to the energy and basic industry sectors has increased. Many of these formerly investment-grade bonds entered the fund at meaningful discounts. The mostly credit-positive environment so far this year has supported high yield, in general, including recent oil price stabilization, and the fund’s higher allocations to these sectors were the main drivers of outperformance vs. the broad high-yield bond market.
IBD: VanEck applied for approval for VanEck Vectors Bitcoin Strategy ETF, but withdrew it after the SEC’s feedback. What are your thoughts on bitcoin (and other cryptocurrencies) – is it the new gold?
Lopez: Bitcoin certainly has similar characteristics to gold given its finite supply and independence from any one central bank, so I can understand the comparisons, at least from an investment standpoint. Still, gold is physical, it’s a real asset. It is still the standard. Cryptocurrencies are digital assets. Like gold, bitcoin and other digital assets have uses other than just as currencies. Gold, for instance, can be used for jewelry or in technology applications. For digital assets the really interesting part of their future potential lies in the underlying technologies that drive them, their blockchains. Digital assets have potential to transform the global economy and how business is conducted, be it supply chain management or using smart contracts to make transactions like buying a house more efficient.
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IBD: Smart beta continues to be popular among ETF providers. What other trends do you see occurring?
Lopez: Smart beta probably still has some room to run, both in equity and fixed income. Also, investors are becoming more sophisticated about evaluating these funds through the lens of factors, or the underlying drivers of returns in a strategy, such as quality or momentum. The proliferation of smart beta strategies leads to a need for investor solutions to help wade through them all. So, you’re seeing a number of fund registrations for fund-of-fund strategies that mix and match different ETFs to solve for some target allocation.
IBD: What’s next for VanEck?
Lopez: VanEck continues to be focused on identifying new investment themes and solutions to help improve investor outcomes. As evidenced by our most recent launch of LFEQ, we have a keen interest in risk management and adaptive asset allocation.
IBD: What types of ETFs should investors focus on in a rising interest rate environment?
Lopez: If you’re an income investor, you probably know that as rates rise, bond prices fall. The natural course of action is to lessen your interest rate exposure by targeting bonds at the short end of the maturity curve. Even so, those bonds may still be negatively impacted if short-term interest rates rise. Alternative options may include getting exposure to investment-grade floating rate notes, which have coupons that generally reset quarterly and that are based on the current level of interest rates. For the more risk-tolerant, business development companies are known for their high income potential generated by lending to, and investing in, private companies. The loans they make are positioned for rising rates with over 80%, on average, in floating-rate loans (vs. fixed-rate loans). Another solution may be to avoid the U.S. yield curve all together and consider non-U.S. dollar denominated bonds such as local currency emerging markets bonds.
IBD: What is VanEck’s outlook on the U.S. and global stock markets over the next three to six months?
Lopez: VanEck believes the biggest opportunity in 2018 is emerging markets equities. Many investors are still underweight emerging markets equities given the long bull market in U.S. equities. Emerging markets equities have outperformed U.S. equities this year pretty substantially and we think this will continue in 2018. Asia is a big part of that story, not only due to the fact that countries like China, India, Korea and Taiwan make up such a large part of traditional emerging markets indices, but also that cash flow for Asian stocks is expected to grow 50% in 2018 and that hasn’t yet been reflected in stock prices.
IBD: What challenges do you face amid increased competition and price wars in the ETF industry?
Lopez: We regularly review our product lineup to make sure our offerings are relevant for current markets and that we are competitively priced for the type of exposure provided. I think part of the challenge in today’s crowded landscape is to stay in front of investors with solution-oriented ideas. To that end, we’ve focused a lot of energy in recent years building out our blog subscriptions, particularly in areas of competitive advantage for us such as gold and precious metals, emerging markets and municipal bonds.
IBD: What sets VanEck’s ETFs apart from the competition?
Lopez: VanEck has always been a forward-looking investment firm and since it is privately owned we’ve had, and still have, the flexibility to pursue ideas in the ways we feel are best. Many of our ETFs were “smart-beta” before that was a term and many of our ETFs are essentially custom crafted for specific markets. If I had to summarize our product development process, it comes down to solving for one main question: “Is there a better way?”
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