If there’s one easy to prediction to make for 2018, it’s that the ETF will continue raking in billions of dollars in net flows. In 2017, U.S. listed ETFs will take in just short of $500 billion, mostly at the expense of the mutual fund industry and higher cost actively managed products. Low costs have been a key driver of the massive growth in ETFs, but so has the emergence of so-called “smart beta” products, funds that essentially combine the better features of both passive and active strategies, and have allowed easy investment in just about any segment of the market imaginable.
While most investor money is likely go into the biggest and cheapest ETFs, the biggest winners of 2018 are likely to come out of the smart beta space. 2017 was the year that you could make money by investing in just about anything, but I think investors will need to be more selective in 2018 to generate returns. The stock market rode the wave of low interest rates, strong year-over-year earnings growth and corporate tax reform to 20% gains in the S&P 500 (SPY), the 9th year in a row of positive returns. Given that they expect the wave to continue, several analysts are already making calls for 3000 on the S&P 500, but I’m more on the cautious side. In my “Positions for 2018” piece on Seeking Alpha, I called for a 4% total return on the S&P 500, which would work out to a price target of around 2750.
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