ETF Flow Stories & Dimensional’s Systematic Active Approach

Subscribe to this podcast on:

On this week’s episode of ETF Prime, host Nate Geraci brought on VettaFi’s Lara Crigger to discuss the most interesting ETF flow stories that have occurred this year. Afterward, Geraci was joined by Rob Harvey of Dimensional Fund Advisors to break down the perks of systematic active investing.

Model Portfolio Momentum

To start, Crigger noted that the BlackRock U.S. Equity Factor Rotation ETF (NYSE Arca: DYNF) had caught her attention. She added that the fund has brought in nearly $6 billion year-to-date. Additionally, it has seen some of the highest flows this year.

Looking at why a factor rotation fund like DYNF is showing such strength, Crigger said it had to do with BlackRock’s allocation strategy. “It’s getting these huge creates, specifically because of model allocation activity, primarily from Blackrock shifting money around in its own portfolios, eating their own lunch, so to speak,” Crigger added.

Following up, Geraci asked Crigger to elaborate on how and why model portfolios can drive flows. Crigger replied that large flow jumps gained by newer or under-the-radar funds can often be attributed to the issuer using the fund within their model portfolio. Crigger used JPMorgan’s BetaBuilders ETF line as an example of these funds. They quickly accrued over $1 billion in AUM, partly due to JPMorgan using the funds within their model portfolios.

Small Cap Strength

With increased concentration risk in the Magnificent Seven remaining on investors’ minds, Crigger noted increased flows heading towards small and mid-cap investments. “I think you’re going to continue to see money going into these small and mid spaces, just as sort of a protection mechanism. Because if Apple so much as misses, billions of market cap get wiped out,” Crigger added.

Geraci agreed, observing that small-cap ETFs such as the Pacer US Small Cap Cash Cows 100 ETF (NYSE Arca: CALF) and the Pacer US Cash Cows 100 ETF (NYSE Arca: COWZ) were resonating with investors in terms of inflows. Crigger noted that the Cash Cows series of funds utilized the concept that high free cash flow yield can be a good quality indicator when evaluating a company.

Crigger added that Pacer’s focus on cash flow helps their funds survive tough economic periods. Meanwhile, the additional free cash enables business growth and more investor dividends.

Gold Rush

Geraci asked Crigger to weigh in on the state of physical gold ETFs. Despite gold prices nearing record highs, Geraci notes that physical gold ETFs have seen billions of dollars in outflows.

Crigger believed that the increasing consensus around rate cuts from the Federal Reserve is souring investor opinion on gold. In an economy with a strong dollar and strengthening equities and labor markets, gold doesn’t appear as appealing as “a store of value”, according to Crigger.

Despite investor perception, Crigger noted that gold still saw strong demand from central banks and individuals who want to hold gold jewelry. Countries such as Poland and China had been purchasing large quantities of gold. Additionally, demand for gold jewelry remained high despite high prices.

Bitcoin Demand

Crigger admitted that the sheer demand for Spot Bitcoin ETFs surprised her. Noting that the initial investor response for the first few weeks was as expected, Crigger was pleasantly surprised to see “the sheer continued and sustained enthusiasm for these products.”

Geraci and Crigger both expressed excitement that Spot Bitcoin funds have brought in a new group of investors. Also, these investors seem deeply engaged with the inner workings of ETFs. Geraci asked Crigger if she expected demand for Spot Bitcoin ETFs to continue in the future.

Crigger believed Spot Bitcoin ETF demand will “absolutely” continue, circling back to model allocations. She noted that some BlackRock funds now have approval to hold Spot Bitcoin ETFs instead of Bitcoin Futures ETFs. As more issuers and mutual funds begin utilizing Spot Bitcoin ETFs in their portfolios, the needle will continue to move.

Systematic Active Approaches

To close out the podcast, Geraci brought in Rob Harvey, Co-Head of Product Specialists and Vice President of Dimensional Fund Advisors. He discussed DFA’s success in the ETF space and the strengths of systematic active investing.

Looking at DFA’s success, Harvey noted that DFA has applied many of their successful mutual fund strategies into the ETF wrapper. “We’ve been able to launch new strategies that are so consistent with our investment philosophy, but really are better tailored to some of the new investors we have,” Harvey added.

Looking at systematic active investing, Harvey saw the approach as leveraging the best of both active and passive investing approaches. Harvey noted that the strategy allowed for broader market diversification and lower costs. Simultaneously, it used academic research and theory that aimed to outperform the benchmark.

For more ETF Prime podcast episodes, visit our ETF Prime channel.