On the latest episode of ETF Prime, VettaFi’s vice chairman Tom Lydon discussed recent advisor polling data with host Nate Geraci, which included surveys on equal weighting, stock valuations, and bond duration. Plus, Nasdaq’s Alison Doyle talked about the flows, trading, launches, and new filings in the world of ETFs. Later in the episode, Zacks’ Sal Esposito explained the Zacks Earnings Consistent Portfolio ETF (ZECP).
Considering an Equal-Weighted Approach
Lydon provided Geraci with a boatload of VettaFi polling data on all sorts of topics, from current markets to the economy to ETFs. After having a field day going through this data, Geraci picked out what he thought were the most interesting results.
The first poll question Geraci brought up centered around the top heaviness of the market. A handful of mega cap growth companies are providing all the returns in the S&P 500. So, when advisors were asked their opinion on an equal weight investment approach, 52% said they would consider investing in a fund that equally weights all positions.
And while the Invesco S&P 500 Equal Weight ETF (RSP) is up 2% year-to-date, the S&P 500 is up about 12% during the same period. But Lydon noted that “historically, over time, equal weight outperforms the cap-weighted strategy.”
Coming out of the financial, there were a handful of tech companies that garnered most of the gain, and now those FAANG stocks… have been the majority of the gain.”
“The big fear that most advisors have today is having so much concentration, as their portfolios are highly correlated to the S&P 500,” Lydon said.
Since “market volatility is the biggest concern of most of the clients out there today,” Lydon said diversifying client portfolios “will probably work well.” He added that “if something’s really want,” advisors should “stay away from that” so they can diversify.
“That’s really key and critical,” he said.
Top Concerns From (Smart) Advisors
The next question Geraci brought up asked what advisors are most concerned about for the next 12 months. Forty percent of advisors who took the poll were most concerned about an impending recession. Meanwhile, 24% said market valuations, while 16% said inflation.
Lydon noted that these responses tell him that “advisors are with it.” After all, “six or eight months ago, their biggest concern was inflation. Today, they think that the Fed’s done a good job and they have it under control.”
But clearly, advisors are concerned about valuations and market volatility. And with the P/E ratio of the S&P 500 nearly double that of the Russell 2000, it’s something advisors haven’t seen in a long time. “So, they’re going to be attracted more towards diversification,” Lydon said. “Not just in large cap, but in mid and small.”
Plus, when looking at valuations overseas, Lydon pointed out that we’re seeing money flow into international markets “like we haven’t seen in a long period of time.”
“They’re smart,” Lydon said. “Advisors are smart and are not getting caught up in the hype.”
So, from the polling data, Lydon said the conversations that advisors are having with clients are: “continue to diversify, continue to not pay too much for stocks.” And while he acknowledged that “yes, we may see a recession,” some recessions “weren’t bad for the market because valuations were right.”
Moving Out of Stocks and Into Fixed Income
When VettaFi asked advisors if they plan to adjust client portfolios for the second half of 2023, 44% said no. But 24% of respondents planned to take money out of stocks and allocate it to fixed income. Only 16% planned the inverse (moving money out of fixed income into equities).
Lydon pointed out that on VettaFi’s platform, “the ticker symbol lookup on fixed income U.S. to corporates more than doubled just in the last 30 days.” To him, that suggests that “there’s more interest there and these polling questions support that.”
In addition, Lydon said he’s “seeing a huge increase in interest… towards global fixed income.” To him, this suggests that many advisors believe that the Fed may have one more rate hike left in them. Which means we’re going to have lower rates a year from now. So, advisors are comfortable going a little bit longer on duration and targeting a little bit less credit quality.
This ties in with results from another survey question advisors were asked. When asked what their views on duration were, 37% said they had begun to take on duration. Plus, 31% said rates have peaked, so they’re going long on duration.
“When you see the flows that are coming into longer duration, it’s because all this money has been on the sidelines,” Lydon said. “And they’re starting to push it back in.”
And Lydon said he thinks that trend is going to continue. After all, once there’s evidence that the Fed is in fact done, we’ll “start to see more money going into longer duration.” And if we start to see inflation more under control, “this may be a run that we have for a period of time.” Which Lydon believes “will be really healthy for portfolios.”
Mitigating Exposure to Market Volatility and Downside Risk
Mitigating exposure to market volatility and downside risk is a top priority among financial advisors. in a VettaFi poll, 60% said this was their biggest goal for clients over the next six months. So, how can advisors do this? According to Lydon, “by diversifying more.”
“Up until two years ago, the average advisor wasn’t as diversified,” he said. “Fast forward to today. They feel like rates are going to be stabilized, they feel like there’s going to be a recession. However, the recession isn’t going to be as harsh.”
So, if a soft landing occurs, and if there are good valuations out there, Lydon said “it just begs for diversification.”
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