CEO of ETF Trends Tom Lydon recently appeared on TD Ameritrade to discuss the popularity of ETFs, as well as top ETFs in the current market.
This year has seen record inflows into ETFs, and it is apparent that ETFs are increasingly sought after by investors. From the genesis of ETFs that tracked the S&P 500 originally, Lydon explained that it’s a fund type that is continuing to grow and expand.
Lydon described ETFs as an area of investing that continues to see innovation; “we’ve got active ETFs, we’ve got innovative, [and]thematic ETFs,” encompassing everything from cannabis to space.
“Any type of asset class/theme/model that you’re looking for, there’s probably an ETF that represents that; it’s tax efficient; it’s also very low cost” Lydon said when discussing why this particular fund type has become so popular.
One of the more appealing aspects of ETFs as an investment vehicle is their tax efficiency. When compared to similarly structured mutual funds, ETFs save money. When a mutual funds has redemptions, it must sell stocks, which sometimes are low-cost basis stocks. The capital gain is then passed forward to current shareholders.
ETFs trade in baskets of securities, and as such they do not incur capital gain. Another big benefit to an ETF is the flexibility within the portfolio via rebalancing.
Yet for now, mutual funds remain the go-to for 401k investing options.
Tom Lydon’s Picks for ETFs
With the 10-year Treasury note beginning to rise again, and yields being as low as they are after having experienced 30 years of rates declining, investors and advisors are concerned about fixed income allocations within a 60/40 portfolio. “Part of what we’ve seen out there, a lot of people are going very short duration, or they’re actually putting it in money market funds,” Lydon explained. Money market funds currently hold $5 trillion, a record high.
For investors looking for alternative income strategies tailored to rising interest rates, JPMorgan and Principal both have ETFs that offer an options overlay approach to equity investing. Those two ETFs are the JPMorgan Equity Premium Income ETF (JEPI) and the Principal Ultra-Short Active Income ETF (USI).
For those investors concerned about inflation, Lydon recommends ETFs that invest in baskets of commodities, such as the Direxion Auspice Broad Commodity Strategy ETF (COM) and the Invesco Optimum Yield Diversified Commodity Strategy No k-1 ETF (PDBC). With gold being an underperformer in the last year, COM is a great ETF to consider because it overweights other areas lilke agriculture and energy.
Lydon explains that 25% of the S&P are in the tech-driven FAANG stocks. Investors looking to explore outside of the traditional tech stocks would do well to look at the ARK Innovation ETF (ARKK), the Invesco QQQ Trust (QQQ), and the Direxion Moonshot Innovators ETF (MOON). ETFs with exposure to innovation, working from home, and fast-growing technologies such as these three stand to have great growth potential moving forward, Lydon believes.
Turning his attention overseas, Lydon believes that despite the saber-rattling that is currently happening between China and the U.S., the two countries are very interwoven when it comes to markets and infrastructure. He recommends the KraneShares CSI China Internet ETF (KWEB) to those looking to invest in China’s internet, which is currently down 30% off its high and is “a bargain,” according to Lydon.
Looking past China, the Emerging Markets Internet and Ecommerce ETF (EMQQ) offers exposure to online internet companies in emerging markets; Lydon gives the examples of Brazil’s version of Uber and companies that manage online shopping somewhere like India. “The prices comparatively to the higher valuations in the U.S. are very attractive,” Lydon said.
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