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5 Hot ETF Themes for 2020

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The U.S. bull market is showing no signs of slowdown with the major bourses scaling new highs. The spectacular run led to huge popularity in ETFs. As such, the broader U.S.-listed ETF industry witnessed the second-largest annual inflow in terms of AUM, just behind the $476.1 billion haul in 2017. Net new inflows were approximately $326.3 billion in 2019, per (read: Most Loved and Hated ETFs of 2019).

The strength continues in the New Year with U.S.-listed ETFs pulling in about $21.7 billion so far in 2020. This suggests a strong appetite for ETFs.

The continuation of some of last year’s hottest trends as well as new ones confirms the bullishness in the ETF industry. Below we have highlighted some of these:

Passive Rule

Like last year, passive investing is expected to be a top theme for 2020 too. This is especially true as Fed’s accommodative interest rate policy, a resilient domestic economy and trade optimism are driving stocks higher. Additionally, corporate earnings are expected to pick up this year after near-zero growth throughout 2019 that will likely fuel strength ahead.

With investors chasing low costs and simple structures, passive ETFs will likely garner strong investor interest as these funds track and replicate an index. As such, S&P 500 ETFs like SPDR S&P 500 ETF Trust (SPY - Free Report) , iShares Core S&P 500 ETF (IVV - Free Report) and Vanguard S&P 500 ETF (VOO - Free Report) are expected to emerge as the top asset gatherers in 2020.

ESG Boom

With continued technological advancement and digital revolution as well as growing awareness, investing in companies with strong environmental, social and governance (ESG) practices has been gaining popularity over the last few years. It highlights the increasing relevance of sustainability criteria, often related to greenhouse gas emissions, gender equality and clean water in investment decisions of institutional and retail investors (read: ESG ETFs: Doing Well And Doing Good).

As a result, the number of ESG ETFs worldwide saw a huge jump from 39 in December 2009 to 221 in June 2019. AUM of these ETFs has grown significantly, quadrupling from $6 billion at the end of 2015 to $25 billion in June 2019. In fact, 2019 was an excellent year for ESG ETFs both in terms of record inflows and solid performance. Of these, iShares MSCI KLD 400 Social ETF (DSI - Free Report) , iShares ESG MSCI USA Leaders ETF SUSL and Xtrackers MSCI U.S.A. ESG Leaders Equity ETF (USSG - Free Report) are the most popular ETFs in the ESG space.

Race to Zero

Price war has been an ongoing theme in the ETF space over the past few years. It is now on high gear with most of the ETFs having an expense ratio of zero or below zero. This war is likely to continue among asset managers in order to attract investors’ money and gain market share. Salt Low TruBeta US Market ETF (LSLT - Free Report) , SoFi Select 500 ETF (SFY - Free Report) and SoFi Next 500 ETF (SFYX - Free Report) have waived their fees for the first year, making them free to investors. iPath Gold ETN GBUG and iPath Silver ETN SBUG are the first zero fee ETNs (read: The Race to Zero: What ETF Investors Need to Know).

Thematic Investment

A rise in thematic investing is making investors go crazy for ETFs as they are jumping on the potential to put their money into a highly specialized theme (or niche investment). This is because thematic ETFs seek to provide exposure to a trend or developing business model through the compilation of securities from multiple sectors. Apart from the ESG-focused theme, cannabis, 5G technology and cloud computing are the hottest trends.

Defiance Next Gen Connectivity ETF FIVG debuted on Mar 4 2019 and has gathered $198.3 million since then while Global X Cloud Computing ETF (CLOU - Free Report) has attracted $469.2 million in its asset base since its debut on Apr 12 2019. Cambria Cannabis ETF TOKE has also been able to garner investor interest, building an asset base of $10.6 million since its launch on Jul 25 2019. Global X Thematic Growth ETF (GXTG) has gathered $2.8 million in AUM since its inception on Oct 25 2019 (read: 9 Successful New ETFs of 2019).

U.S. Treasury to Take Off

The fixed income world gained immense investor love last year amid persistent stock market volatility brought in by trade war, global growth concerns, recession fears and a flattening yield curve. The trend is likely to continue in 2020, which is likely to be filled with volatility backed by geopolitical tensions, trade uncertainty and the U.S. presidential election. Additionally, the Fed kept the interest rates steady for this year after three rate cuts last year, maintaining the lure for fixed income ETFs (read: 5 ETFs to Profit From Rise in Middle East Tension).

Against this backdrop, U.S. Treasury bonds, especially the long-dated ones, will likely take off this year. iShares 20+ Year Treasury Bond ETF (TLT - Free Report) , iShares 10-20 Year Treasury Bond ETF (TLH - Free Report) and Vanguard Ext Duration Treasury ETF (EDV - Free Report) are some of the bond ETFs targeting the long-end of the yield curve.

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