“We look at flows that are going into ETFs and out of ETFs that really tell us where smart money might be going,” added Lydon with regard to an influx of $264 billion in ETFs year-to-date.

Emerging markets have been marred by the trade wars between the U.S and China, causing a negative ripple effect into emerging market ETFs, such as the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO)–down 11.82% YTD, iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG)–down 12.33% YTD and iShares MSCI Emerging Markets ETF (NYSEArca: EEM)–down 12.24% YTD. Nonetheless, the YTD pains these ETFs have been experiencing through the majority of 2018 appear to be subsiding.

Despite the deep declines, with respect to value compared to price, many of these ETFs from abroad present a profitable opportunity that can be realized, especially if China and the U.S. ameliorate their trade differences. It presents an interesting opportunity for the investor who is seeking value in terms of locating discounted assets.

Fixed Income Inflows, Large-Cap Bellwether

As equities continue to sell off, Lydon is also noticing that inflows into the tried-and-true safe haven of bonds is becoming more readily apparent as flows into fixed-income ETFs increase. In addition, large cap equities will continue to be the bellwether that signals where the market will be heading, especially as portfolios experience shifting ahead of 2019.

“Large cap growth has been the bellwether where we haven’t seen money come out,” said Lydon. “We’ve seen a lot of money going out of money like quality, value–those factors for sure, especially ETFs around the world continue to sell off, particularly as the markets continue to get weaker.”

Needless to say, money managers will be closely watching market behavior to end 2018 as one more rate hike by the Federal Reserve is on the horizon and geopolitical factors like trade wars will give an indication of where to allocate capital before the new year.

“The key thing here as we go into the end of the year–managers are on a precipice–‘Am I going to show big cash values or allocations at the end of the year because my clients are concerned on what might be coming on next year? I don’t want to look like I’m fully invested if the market’s declining,'” said Lydon.

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