Tom Lydon, CEO of ETF Flows, recently appeared on Yahoo! Finance to discuss ETF inflows, the shift by investors away from fixed-income and into equities, and inflation fears.
Lydon believes that if inflows are any indication, investing in the tech sector looks to be coming back around. Current inflows to ETFs are at $520 billion, surpassing 2020’s inflows of $509 billion.
Covid saw investors turning to thematic stocks as well as work from home stocks, but as the economy reopens, there is a turning back.
“We’ve seen a shift back to the FAANG stocks,” Lydon explained, indicating that these are the stocks that investors believe will lead going forward. The FAANGs and Microsoft, and Berkshire Hathaway collectively makeup 25% of the S&P 500 and are major market movers.
Fears of inflation have altered inflows into the markets. Last year saw large investments into fixed-income ETFs and less in equities. This year there is only a 25% inflow into fixed-income ETFs.
“After 30 years of declining interest rates, most investors don’t feel that rates can get much lower,” Lydon said.
Pivoting From Tradition
The traditional split between 60% investment in equities and 40% investment in fixed-income is becoming allocated increasingly heavier towards equities as investors pivot away from fixed-income. Shifting investing habits have some investors also turning to dividends ETFs where there is the potential for a better yield than the ten-year treasury.
Advisors’ top two concerns recently have been inflation, followed by valuation. For advisors that might be looking to hedge their portfolios against inflation, investing in commodities is a way to capture rising prices, as they typically rise in tandem with inflation. The largest commodity-oriented ETF is the Invesco Optimum Yield Commodity Strategy (PDBC) which is up over 31% year-to-date.
Banks are looking to prosper with the concern of potentially rising interest rates, particularly regional banks whose earnings are wrapped in lending. A 1% increase in the interest rate would see regional banks doing “very, very well,” Lydon explained.
The SEC is set to meet tomorrow but Lydon doesn’t expect any surprises to come from that meeting as their messaging has been fairly consistent, despite rising housing costs, high costs of groceries, and the labor market concerns.
“Come fall, we’re going to have to see some pullback in inflation, or the Fed is going to have to take action,” Lydon said.
For more market trends, visit ETF Trends.