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Jan. 2, 2016, 9:43 a.m. EST

7 ways mutual funds and ETFs will challenge investors in 2016

Forecasting the industry’s big changes in the coming year

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By Chuck Jaffe, MarketWatch


First Snow Distribution/Courtesy Everett Collection

You don’t need tarot cards, a crystal ball, the entrails of animals, a rooster pecking at grains, tea leaves, or coffee grounds to tell the future of the mutual fund business. You just need to look at trends underlying the industry.

So while I honestly expect to see all of the following predictions come true in 2016, I think that at least five will set the tone for how investors view mutual funds and exchange-traded funds a year from now.

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The big fund stories for 2016 will include:

1. Money funds see no significant increase in payouts until the Federal Reserve completes its third rate hike, if then

The economy may be moving away from a zero-interest-rate environment, but money funds won’t follow at first. Most fund firms that have kept their money-market funds open for the last few years have been operating those issues with significant fee waivers; it’s the only way the funds could stay positive.

Fund firms aren’t in the business of running loss-leaders, so they will keep nearly all of the Fed’s first two rate hikes for themselves.

Savers won’t see any real renewed payment from money funds until the Fed has hiked rates by 0.75 percentage points or more.

2. Over 100 alternative funds/ETFs shut down

Alternative funds have been the fastest-growing segment of the business for several years, but not everything that the industry has thrown up on investors’ walls should stay there. In 2015, alternatives represented about 6% of all fund closures and liquidations.

This year, expect one in every eight to 10 closings to involve an alternative fund.

That’s a reason to avoid new funds until they have reached a critical mass — $50 million or more in assets — and to let new issues prove themselves before jumping in.

3. At least one alternative fund implodes before it closes

Investors saw an implosion in the GL Beyond Income fund late in 2014, and saw Third Avenue Focused Credit Alternative fund lock in shareholders when it couldn’t unload illiquid ultra-junky securities late in 2015.

While each fund suffered unique problems — the Beyond Income fund was the alleged victim of fraud by its manager — what’s not exclusive is that the managers took on heightened risks, got into a pinch, and then got squeezed.

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About Chuck Jaffe

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Chuck Jaffe is a senior columnist for MarketWatch. Through syndication in newspapers, his "Your Funds" column is the most widely read feature on mutual fund...

Chuck Jaffe is a senior columnist for MarketWatch. Through syndication in newspapers, his "Your Funds" column is the most widely read feature on mutual fund investing in America. He also writes a general-interest personal finance column and the Stupid Investment of the Week column. Chuck does two weekly podcasts for MarketWatch, and frequently makes guest appearances on television, and on radio shows across the country. He is the author of three personal-finance books. His latest, “Getting Started in Hiring Financial Advisors,” was published in the spring of 2010 by John Wiley & Sons.

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