Many of the niche smart beta ETFs that have come to market risk "sinking without a trace" according to an investment manager at Seven Investment Management.
Peter Sleep said equity ETFs are becoming increasingly specialised – to the extent you can now buy ETFs playing themes such as robotics, ageing and millennials.
Mr Sleep said: "This is nothing new, as during the commodity boom we had shipbuilding ETFs, which sank without trace, and coal mining ETFs, that caved in.
"It will be interesting to see whether all these ETFs survive in a Darwinian world and what new ETFs we will see in 2018.”
Mr Sleep said the passive fixed income products currently on the market are often wrongly labelled smart beta because they buy bonds in relation to how long those assets have until maturity, but he thinks the gap in the market is for fixed income products focused on value or momentum styles of investing.
He said equity passive funds that invest in a shares based on market capitalisation traditionally expose the investor only to the risk that the share falls in value, while such passive strategies in the ETF market mean an investor risks owning a bond that defaults, causing the investor to lose all of their money.
Mr Sleep said another innovation for the ETF market could be the advent of products that allow investors to short-sell a particular bond market, something he would regard as a positive for investors.
david.thorpe@ft.com
