As we come to the end of this year and look ahead to a new one, it may not represent as fresh of a start as one would typically think. 2021 showed us that some financial services and fintech trends that emerged as a response to COVID-19 are here to stay. Beyond COVID-19 impacts, areas like ESG-focused investing and cryptocurrency have also proven their staying power this year.
Below we look at some of these changes and what they mean for investors.
Rise of the retail investor
What was once a small piece of financial market activity has become a driving force. Since the pandemic, retail trading has been the second-largest source of trading volume, with retail investors trading more stocks than mutual funds, quantitative hedge funds and banks. Only high-frequency trading firms transacted more. While volumes have come off all-time highs earlier this year, retail investors have demonstrated that they can significantly impact the market.
Some factors that contributed to the surge in trading, like disposable income and excess time due to being stuck at home, will subside. 2021 has shown us that retail activity will likely stay elevated, as free trades and persuasive design have helped usher in a new cohort of active traders. Their trading patterns favor individual securities to broad diversification, and show little regard for fundamental valuations. Additionally, a tendency to coordinate in online venues amplifies their influence, contributing to market rallies (and volatility) in unprecedented ways.
This leads to another industry effect: regulation changes designed to protect the interests of everyday investors. There’s more focus than ever on how financial firms engage with their customers online.
Sponsored Content
ESG investing
ESG investing is not a new trend, dating back to as early as the 1970s. But the focus on dollars flowing into ESG investing increased dramatically over the last few years, accelerating in 2021. The U.S. sustainable fund landscape saw $15.7 billion in net inflows during Q3 2021, coming on the heels of the record $21.5 billion in Q1 2021.
National attention on climate change, pay inequity, mass incarceration and gun violence has elevated these issues in the minds of many investors. At the same time, younger generations with stronger ESG preferences are accumulating wealth as older generations are spending it down in retirement. Investors are looking beyond the balance sheet and demanding corporations consider their broader social impact. By some estimates, ESG may become integrated into half of all U.S. managed accounts by 2025. More access to ESG investment options means that investors will have more ways to reflect their values in their portfolios.
Going forward, we should expect better alignment on ESG definitions and metrics. Just last month, market regulators set out a global framework to refine ESG investment ratings and help combat “greenwashing,” or overstating the environmental credentials of an investment or activity. As more investors align their investments with their values, and more regulations are enacted, we are sure to see long-term changes to investor behavior and corporate accountability.
Sponsored Content
Crypto boom
Crypto assets continue to mature with an expanded investor base. Most notably, 2021 saw institutional investors become more involved. A study by Fidelity Digital Assets found that 7 out of 10 institutional investors expect to buy or invest in digital assets in the future. As of November, the total cryptocurrency market capitalization was $2.79 trillion. While less than 2% of the global stock and bond market, crypto has already eclipsed the TIPS market in size and is approximately one-third the size of the U.S. tech sector. Despite their volatility, crypto assets continue to gain more widespread adoption as an asset class, finding their way into more investors' portfolios.
Additionally, ambitious technologists are developing financial infrastructure on the blockchain, seeking to reshape the financial system into a more decentralized and accessible place. In 2021, VC’s invested $17 billion in crypto projects. While these DeFi projects are still in their infancy, they have the potential to structurally change how we transact in our financial lives.
With substantial activity comes substantial regulatory oversight. The infrastructure bill recently signed by President Biden requires all crypto exchanges to notify the IRS of their transactions. The past year showed that while there’s still a lot of uncertainty, we’re hopeful regulators will continue to work with crypto assets rather than try to regulate them out of existence.
Sponsored Content
Investor personalization
In an efficient expression of the above themes, an increasing number of investors have adopted direct-indexing strategies, which involve buying the underlying securities of an index like the S&P 500 and selling the stocks that decline. This could allow investors the potential to capture the capital gains if the index rises while creating losses that help offset them at tax time, helping investors keep more of their profit. Investors should consult their tax professional if considering this type of investment strategy.
What’s more, this strategy sheds light on the importance of allowing personalization in investing. Many large asset managers have identified direct indexing as transformative, and invested in technology that informs the process. This represents a major step toward an industrywide focus on better investor outcomes and, ideally, lower costs for people across the board.
With 2021’s financial industry headlines not quite in the rearview mirror, investors should remain aware of how some of the trending topics will impact strategies designed to grow their portfolios in the coming year. If next year is anything like this one, we’re in for more changes, regulation, tech and opportunity.
Sponsored Content
-
Stocks Hit Fresh Highs Ahead of the Fed As Earnings Pump Optimism: Stock Market TodaySHW and UNH were two of the best Dow Jones stocks Tuesday, thanks to solid earnings reports, and MSFT closed with a $4 trillion market cap.
-
Selling Your Haunted House? What You Have to Tell Buyers (and What You Don’t)You don’t need ghosts to spook buyers, sometimes a home’s past is enough. Here’s what sellers should know about disclosure laws, pricing and perception when a property has a haunted history.
-
Debunking Three Myths About Defined Outcome ETFs (aka Buffered ETFs)Defined outcome ETFs offer a middle ground between traditional equity and fixed-income investments, helping provide downside protection and upside participation.
-
This Is Why Judge Judy Says Details Are Important in Contracts: This Contract Had HolesA couple's disastrous experience with reclaimed wood flooring led to safety hazards and a lesson in the critical importance of detailed contracts.
-
A Lesson From the School of Rock (and a Financial Adviser) as the Markets Go Around and AroundIt's hard to hold your nerve during a downturn, but next time the markets take a tumble, remember this quick rock 'n' roll tutorial and aim to stay invested.
-
I'm a Financial Pro: This Is How You Can Guide Your Heirs Through the Great Wealth TransferFocus on creating a clear estate plan, communicating your wishes early to avoid family conflict, leaving an ethical will with your values and wisdom and preparing them practically and emotionally.
-
To Reap the Full Benefits of Tax-Loss Harvesting, Consider This Investment Strategist's StepsTax-loss harvesting can offer more advantages for investors than tax relief. Over the long term, it can potentially help you maintain a robust portfolio and build wealth.
-
Social Security Wisdom From a Financial Adviser Receiving Benefits HimselfYou don't know what you don't know, and with Social Security, that can be a costly problem for retirees — one that can last a lifetime.
-
Take It From a Tax Expert: The True Measure of Your Retirement Readiness Isn't the Size of Your Nest EggA sizable nest egg is a good start, but your plan should include two to five years of basic expenses in conservative, liquid accounts as a buffer against market volatility, inflation and taxes.
-
New Opportunity Zone Rules Triple Tax Benefits for Rural Investments: Here's Your 2027 StrategyNew IRS guidance just reshaped the opportunity zone landscape for 2027. Here's what high-net-worth investors need to know about the enhanced rural benefits.
