ETF Trends CEO Tom Lydon appeared on Yahoo! Finance Live on Monday to discuss the state of the market, what ETFs have contributed, and other positives deserving focus in this late-cycle period.
Global ETF assets have now passed $6 trillion, doubling in size in under four years. U.S. listed ETFs make up a majority of that total (about $4.3 billion).
As Lydon explains, the market has been great for over a decade, with a big shift-on in which money is moving out of active mutual funds into passive ETFs. Still, there are a few trends specifically from this year to make things even more apparent.
“For the first time in 26 years of ETFs, we’re seeing more money going into fixed income ETFs,” Lydon notes. “Part of it is people feel the market’s a little long in the tooth. There’s also trade talk that doesn’t make people feel good. Recession talks are in the works. So, people are not avoiding ETFs. What they are doing is diversifying a little bit more.”
That speaks to how it doesn’t have to be all equities. Additionally, on the equity side, compared to just investing in the S&P 500, there are more smart beta strategies with a move value-orientated approach or a more diversified one. This is where the index construction would be more intelligent, which people don’t mind paying more for, to become more diversified.
Where Opportunities Lie
As far as what to tell investors, Lydon has some thoughts on where he believes there are opportunities. Looking at the average investor, 95% of their portfolio is correlated to the S&P 500. As the S&P 500 has evolved from 10 years ago, it’s proven to be better to spread out the investments, which brings to mind some notable ETFs.
“One great ETF to consider is the Invesco Equal Weight S&P ETF (RSP),” Lydon adds. “It has an equal weight of all 500 stocks; so, you’re not as jacked up on the biggest companies out there. You’re more diversified, and you’ve got more smaller or mid-cap stocks in the portfolio that are going to give you a little bit more value, as opposed to this ‘go growth’ mode.”
As far as what areas to avoid, given the potential for too much risk, Lydon explains how the international market is more uncertain. That in mind, Lydon notes the value is there. So, especially in emerging market areas, one could actually buy stocks that are 30 – 40% off on the PE ratio, compared to that on the S&P 500.
Looking at those areas could mean taking a bit of a hit in the coming year. Still, if an investor’s portfolio is highly correlated to the S&P 500 (and most do have a home country bias in the U.S.), there’s little reason not to diversify overseas as well.
Related: Tom Lydon on CNBC: ETFs to Watch as Market Hits New Highs
Taking a real macro point of view, Lydon also notes how the most significant risk to the market is confidence from small companies.
“63% of small companies are responsible for GDP,” Lydon explains. “When small companies are actually feeling good, they hire a little bit more or put more into R&D and that sort of thing. So, look at investor confidence, which is actually really high right now, but small company confidence has weaned a little bit. That’s a key indicator.”
Watch Tom Lydon Talk Trends, Risks and More:
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