With ETFs and inflows having done incredibly well as of late, it’s important to look at the possibility of inflation. ETF Trends CIO and Director of Research Dave Nadig joined host Nicole Petallides on TD Ameritrade Network to break down the latest trends in ESG ETFs and shed some light on the current state of bonds.
As Nadig explains, there are supply constraints that are starting to drive up core prices. Areas such as lumber, oil, copper, corn, and more are seeing a rise. With that in mind, many advisors and investors are looking into commodities plays. Money has flowed into the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC), which has pulled in around half a billion so far in 2021, a great number for a commodities fund.
Nadig also pointed to the Invesco DB Agriculture Fund (DBA), which only provides exposure to corn, soy, sugar, and wheat. The fund is up 14% so far this year.
Looking toward technology and the equity space, many investors are wary of inflationary pressures. To do that means looking at things like traditional value, dividends, or real estate, which can help with diversification and income. “I think that intra-equity rotation is going to be with us for a while,” Nadig states.
As far as the last four months of flows, Nadig points to the Vanguard Value Index Fund ETF (VTV), which is not too flashy but provides the safety many investors are looking for.
Moving into thematic investing, Nadig explained how one interesting challenge is distinguishing the ESG funds from the non-ESG funds. One of the largest ESG launches ever, the iShares Carbon Transition Readiness ETF (LCTU), with $1.25 billion from the California Teachers Retirement System, showed just how popular these funds can be, given the different company holdings and the investors who wanted in.
“People want to feel good about their investing. They want some of that ESG,” Nadig explains. “At the same time, they don’t want to abandon their benchmarks entirely. That’s sort of the battle we’re seeing in ESG right now – how do you be ESG but still stay market weight? That’s a real challenge, but that’s where most of the assets have been going – fairly watered-down approaches to ESG.”
Looking at bond ETFs, Nadig makes it clear – investors want almost nothing to do with long bonds. They have been at continuous outflows at the long end of the curve. Some of that has rotated into the very short end of the curve, but the story is still clear. Nadig adds that “people are either staying out of bonds, or if they are staying, they’re sticking to very short duration, and they’re really looking for yield.”
“We’ve seen the flows really about flows, 5 to 1, equity to bond, so far this year. I don’t think that’s going to change in the foreseeable future.”
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