ETF Fees, Flows, & Performance

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In the latest episode of ETF Prime, VettaFi’s vice chair Tom Lydon offered perspective on the strong start to 2023 for several ETF categories. Later in the episode, FactSet’s Elisabeth Kashner highlighted the latest ETF flow and fee trends.

Return of The Cathie Wood-Type Companies … And Emerging Markets

After pretty bearish sentiments at the end of 2022, it’s been a rather odd start to the year for ETFs. Funds and sectors that struggled in 2022, particularly disruptive technology and emerging markets funds, are rebounding so far this year. The ARK Innovation Fund (ARKK) had its best single month of performance in January. Some blockchain ETFs are up 80% to even 100%. International ETFs also continue to outperform. The 50 most shorted stocks in the Russell 3000 are up 15% this year as of January 26.

“We’re seeing those areas of the market that got crunched the most in 2022 are having the best time in the market so far year-to-date,” Lydon said, citing “disruptive, Cathie Wood-type” technology companies and emerging markets, “specifically China,” as the big winners so far this year that have rebounded from “the lows that we saw in the beginning of November.”

Lydon added that “those areas have declined so much that it makes sense at some point in time they will recover. It’s not as though these companies are going to go away. They will recover.”

Plus, looking at both the short- and long-term trends, whether it be in the form of a 50- or 200-day moving average, “those areas right now look to be positive, especially areas like China and emerging markets that have been so unloved for the last five years.”

More Advisor Confidence in Growth, Tech, and Fixed Income

With inflation cooling down, investors are anticipating the Federal Reserve to pivot from its hawkish position on raising interest rates. If that happens, that could theoretically foster an environment that favors riskier assets.

Lydon conceded that “the Fed has a tough job, and there’s never success in landing that Goldilocks scenario.” That said, he is seeing a couple things from advisors. Not only are they becoming “a little more confident in growth and technology,” but they’re also becoming going longer and higher on the fixed income side.

“You’re starting to see more advisors that are going longer in duration and… going up the yield curve,” Lydon said. “Where short duration high quality was really important, now, we’re seeing more appetite for corporates, more appetite for high yields, and with the idea that maybe a year or two from now you’re not going to get the yields that are offered today.”

He added that an advisor going further out on duration “might be able to lock in some decent yields and get back to that 60/40 allocation that many abandoned just a couple years ago.”

The Rise of International Stocks

Over the past 10 years, there was such a home country bias to U.S. investors, who were allocating less to developed countries and emerging markets. But that’s all changed now, and international stocks, both in emerging and developed markets, are “starting to take flight,” with more assets flowing overseas to funds that are outperforming.

“It’s not just being in the right spots but it’s the allocation that you have in the right spots,” said Lydon, adding that investors are diversifying not only to developed countries but also to EM.

“Now’s a great time to make sure you have some allocation overseas, because the price is right,” he added. “Don’t just be focused on U.S., don’t just be focused on large-cap.”