Even before the fourth quarter gets under way, Tom Lydon, editor of ETF Trends.com, is predicting it's going to be another good one for the industry he tracks. As it stands now, he says exchange traded funds have already gotten "more than their fair share this year"of investor money, and points to $120 billion of net ETF inflows year-to-date compared to about $40 billion of outflows from equity mutual funds.
Still, with approximately $1.2 trillion under management, the upstart ETF business can still claim only about 10% of the $12 trillion in total assets that is held in mutual funds, according to Investment Company Institute data. That gap is set to narrow once again Lydon says, as he expects to see ''huge inflows'' to ETFs - whether the market goes up or down - and cites three different scenarios in the attached video that will support it.
First and foremost, Lydon points to the path that has left the S&P 500 close to a five year high, calling the advance "one of the most unloved rallies we've seen in decades." As he sees it, further market gains will only tempt more investors to chase a hot stock market and flee the crowded bond market, which itself, he says has seen an enormous influx of new money.
Another area of asset opportunity Lydon highlights is the $3 trillion that's currently sitting in money market funds earning virtually no return whatsoever. Not only does he sees this money as loosely attached, but he also thinks it is vulnerable to flight if another ''break the buck'' moment occurs and a fund fails to maintain its $1 price. So far, money market reform efforts have yielded nothing, but have also not been needed. However, should we find ourselves in a rising interest rate environment, Lydon thinks the buck standard could be retested.
And finally, he cites a general increase in investor interest for nontraditional investments, including commodities like gold and silver, which have become far more commonplace. Add in the possibility of improved earnings, a truce over tax reforms, or an old fashion post-election pop, and you have a market that could jump higher, he says, and take ETFs along with them.