ETF Trends’ head of research, Todd Rosenbluth, stopped by the TD Ameritrade Network this week to discuss the ETFs to watch amid global changes.
First off, Rosenbluth notes disproportionately high exposure in interest in aerospace and defense-oriented ETFs. There used to be only one of these ETFs among the top hundred up until February, and now there are four — the iShares US Aerospace and Defense ETF (ITA), along with products from Invesco, ARK, and a SPDR product. This has happened for understandable reasons, given the geopolitical tensions taking place due to Russia’s invasion of Ukraine.
Looking toward the effects of inflation and actions by the Fed, interests in tech exposure have risen as well. As Rosenbluth explains, the Vanguard Information Technology ETF (VGT) has been one of the more popular funds. It provides broad market cap-weighted exposure to companies such as Apple and Microsoft, as well as smaller companies outside of the S&P 500.
Rosenbluth adds, “Technology has been one of those areas that have faced more challenges, given rising interest rates and how technology companies tend to do less well during these environments. They don’t benefit the same way that an aerospace ETF with big holdings will.”
Moving on, with this year being marked as a stock picker’s market, Rosenbluth points out how research shows how hard it’s been for active managers to beat the S&P 500 in 2021. In fact, for twelve consecutive years, the average actively managed large-cap mutual fund failed to keep up with the S&P 500.
However, for those looking for active management, there are opportunities using ETFs such as ARK’s Space Exploration & Innovation ETF (ARKX). The same goes for thematic investing with ARK as well. Recently, Rosenbluth has been seeing talks with advisors about Dimensional funds and Avantis, which have small-cap actively managed equity ETFs.
Speaking to the retail investors who have been cashing out of this market, seeking safety in cash, as far as safety plays go, Rosenbluth explains the benefits of ETFs. For example, Vanguard’s Short-Term Corporate Bond ETF (VCSH) benefits from the diversification of investment-grade credit companies with less interest rate sensitivity. It’s the sort of fund that will hold up better and have the desired credit quality during times of uncertainty.
Looking at how this year’s volume of inflows and outflows compares to the past, there’s unlikely to be another record made in 2022. As Rosenbluth states, it’s partly because fixed income ETFs have investors acting more cautious, given the rising interest rate environment. There is strong demand for broad core equity products.
“We think it’s going to be a good year for ETF adoption, but not as great a year as we saw in 2021.”
With all of that said, another area Rosenbluth explains to be of interest is dividends, which is an area where investors will rotate from the equity perspective in times of uncertainty. This is being seen in the flows. The Vanguard Dividend Appreciation ETF (VIG) has been popular, as have HGV, DVY, and others that serve as suitable anchors for investor portfolios to get some equity income.
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