5 smart beta predictions for 2018

Smart beta’s popularity is soaring. Sara considers trends for 2018.

Every year, we write about trends to expect for smart beta. Factor-based strategies and smart beta ETFs have been growing in popularity with investors, leading us to wonder what new twists we could see in 2018.

1. Momentum may share the spotlight with value

The momentum factor had a strong year in 2017, with the MSCI USA Momentum Index rising 37.8%. But performance for individual factors is cyclical, and there can be several inflection points within a calendar year (in fact, we refresh our forward-looking views monthly). We still think momentum has further room to run, but we have also improved our outlook on value in the U.S., where valuations are attractive and wage growth may drive interest rates higher. Globally, where inflation is expected to be more benign and valuations are less attractive, we currently have a neutral view on value.

2. Multifactor can gain popularity

Investors are increasingly recognizing the potential diversification benefits of deliberate exposure to complementary factors through multifactor strategies. Assets in multifactor smart beta ETFs grew by more than $20 billion in 2017, according to BlackRock, and we expect that growth trend will continue. Staying diversified across style factors is an important consideration, given the historically cyclical nature of their outperformance relative to the overall broader market. For extra credit, U.S. investors may want to look outside their borders and consider a global multifactor fund as well.

3. Fixed income is a slow (but forward moving!) train

Fixed income smart beta funds, much like winter, are coming. We believe there are many opportunities for factor investing to seek improved diversification and a better return for cost trade off in fixed income. My colleague Matt Tucker wrote about the journey for fixed income factors recently and explained that BlackRock launched two style factor indexes in 2017 using quality and value factor insights. It’s still early days for factors in fixed income—it may not be the trend that dominates for 2018, but it’s an area of future growth potential we remain excited about.

4. Active, passive and smart beta can be complementary

Investors are growing increasingly smart (pun intended!) about how they add smart beta to their portfolios, often complementing both active and passive strategies. The trend for 2018 may not be just investing thoughtfully in factors as discrete smart beta positions, but putting factors to work within other types of funds. This could mean putting retirement savings into target date funds powered by smart beta, balancing style factor exposures across equity funds, or using smart beta ETFs to refresh style box holdings.

5. Taxes always matter

Some people are wondering if they should change their investment strategies in response to the new tax rules. While investors will want to consult a tax professional about their personal situation, I want to remind readers that ETFs are generally quite tax-efficient investments, and iShares smart beta ETFs have been no exception. The distribution history for BlackRock’s smart beta ETFs can be found at ishares.com.

I’m excited about the opportunities ahead in 2018 for smart beta and for markets in general. And my personal goals? Check out the New Year’s resolutions made by blog contributors.

Sara Shores is the Head of Strategy for BlackRock’s Factor-Based Investments and a regular contributor to The Blog.

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective. Diversification and asset allocation may not protect against market risk or loss of principal.

Transactions in shares of ETFs will result in brokerage commissions and will generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders. Past distributions not indicative of future distributions. This material does not constitute any specific legal, tax or accounting advice. Please consult with qualified professionals for this type of advice.

This post contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

There can be no assurance that performance will be enhanced or risk will be reduced for funds that seek to provide exposure to certain quantitative investment characteristics (“factors”). Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. In such circumstances, a fund may seek to maintain exposure to the targeted investment factors and not adjust to target different factors, which could result in losses.

The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

©2018 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

375620