Having been well schooled in the meaning of the term “black swan event” over the last decade, investors are already peeking around corners and looking for places to hide in case something unexpected pops up to derail the global economy. And, as tensions rise in Ukraine and other areas of the world, investors seem more jittery than ever.
So how is all this fear playing out in the exchange-traded fund (ETF) space? A couple of trends came to light this past week.
First, government bonds are suddenly a big hit again as ETF investors seek a safer place to park their cash in a world filled with political landmines. According tothis Bloomberg article, government bond ETFs have recorded inflows of US$8.7 billion so far this year, boosting assets by 25%. It’s the largest increase of any fixed income or equity class, says Bloomberg, which also notes investors are showing their concerns over the economic growth outlook.
In the U.K., the Financial Times ran this story suggesting that ETF investors might want to take a second look at actively managed products to help weed out geopolitical trouble spots. When the going gets rough on the global political scene, some experts say a passive strategy based on a broad index is more vulnerable to shocks in certain areas of the world. One small part of the whole can bring the entire index thing down. The fix? Instead of pulling out of emerging markets indexes, you can simply buy an ETF based on an index that doesn’t include the underperformers.
As one manager quoted said, “Statistics show that active management is unpredictable. However, in the market dislocations caused by political risk, active manager skills become more important, and they may be able to deliver better returns than the passive market.”
Then, of course, there are gold ETFs, which, as I pointed out a couple of weeks ago, could be experiencing somewhat of a surge and investor uncertainty returns with a vengeance.
Ultimately, it could be an interesting fall for ETF watchers—as equity investors await what many say is a long overdue market correction and as political tensions continue to brew, all eyes are on the indexes and their rather nervous investors….