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Energy sector has been a ‘driver of performance in the last year,’ ETF researcher says

Todd Rosenbluth, ETF Trends Head of Research, sits down with Yahoo Finance Live to talk about current ETF trends, energy and commodity-focused ETFs, and the Fed's interest rate hike schedule,

Video transcript

EMILY MCCORMICK: And as stocks rallied by more than 6% just last week, traders were buying ETFs, according to a new fund flow analysis from Bank of America. Analysts at that firm said that in a reversal from recent weeks, clients were broadly net buyers of equity ETFs across a broad range of sizes and styles. For more on where the money is flowing in ETFs, we have now Todd Rosenbluth, ETF Trends head of research here with us, as part of our ETF report brought to you by Invesco QQQ. Todd, thanks for your time today. How have you seen demand for ETFs versus single stocks trending broadly over the course of 2022 so far?

TODD ROSENBLUTH: So we, at ETF Trends and ETF Database, work with advisors. We do a number of surveys throughout the year. And we've started to see earlier in the year that advisors were increasingly looking towards dividend strategies. And in fact, they've told us they were doing so because they were trying to combat the effects of inflation and still wanting to get income. We're now starting to see that data actually come in from a flows perspective.

Dividend ETFs have been particularly popular in recent weeks as a way of getting both equity exposure, of course, being able to participate in the stock market, but also getting that steady stream of income in the face of both rising inflation and the Federal Reserve that is beginning and has more plans to raise interest rates throughout 2022. So dividend strategies have been particularly popular with investors.

EMILY MCCORMICK: That said, Todd, have all dividend ETF funds been treated equally, or are ones that focus more on the value side versus growth names that pay dividends or blends of both getting more attention here from investors?

TODD ROSENBLUTH: So we are seeing a mixture of both the growth oriented strategies like VIG, which is Vanguard Dividend Appreciation ETF, and DVY, which is iShares Select Dividend ETF. The iShares Select Dividend ETF is more value oriented. It's weighted based on the dividend yield. It has heavier exposure to utility companies that are more traditionally value oriented, whereas VIG is more growth oriented. Microsoft is a top holding within that portfolio.

So we are seeing more of a variety of approaches, but those ETFs are going to perform quite differently. In fact, DVY has been by far the much stronger of those two products this year because that utility exposure, because that energy exposure that has performed very well. Not all dividend ETFs are going to perform the same, even though they both have dividend ETFs or dividends within the name of the ETF.

EMILY MCCORMICK: And to that point, Bloomberg flagged earlier today that the correlation between the S&P 500 energy sector and the broader index turned negative for the first time since 2001. What have you been seeing? And what does this mean for investors who perhaps rotated into energy focused ETFs and funds that track the S&P 500 energy sector and where that may be headed?

TODD ROSENBLUTH: Well, look, I think it's important to highlight that the energy sector is a very small piece of the broader S&P 500, roughly 3% overall. It actually was considerably lower a year ago until energy performed better. It's been the driver of performance in the past year. So investors that have overweighted exposure to energy have been rewarded over time because it's such a small piece of the portfolio. We are seeing continued interest in energy equity products, as well as broader commodity oriented ETFs, that invest either in energy and gold or a broadly diversified basket, as investors are, again, looking to be able to participate in both the opportunity, as well as protect against the risk of rising inflation.

EMILY MCCORMICK: And for funds that would benefit or ostensibly benefit from the Fed's rate hiking environment, like the ones that you mentioned in your note to us earlier, certain ultra short bond funds, is there still room for these to run in your opinion, or have most of the gains been put in now that we have this first Fed rate hike behind us?

TODD ROSENBLUTH: Well, we think we're going to have more rate hikes going forward. The Federal Reserve is telegraphing that they're going to have perhaps even six more in 2022, and certainly more that are going to happen in 2023. So an ETF like JPST, which is JP Morgan's Ultra Short Bond ETF, has been a good place to be able to park assets, earn a little bit of income, and have the benefits of active management combined with that.

So it has stood out among the actively managed ultra short products this year. Investors continue to put money in to these products, willing to get a little bit more income as opposed to having just the safety of the Treasury products that you might get with the Ultra Short Index-based products. So JPST has stood out and we think it's likely to continue to see interest, as investors remain nervous heading into the Federal Reserve hiking program.

EMILY MCCORMICK: And switching gears here, I'm wondering what you've been seeing in terms of thematic investing. You know, in the past year, we saw, really, this rise of the Ark Innovation ETF as just one big popular example of a fund where future innovation was really the focus of that fund. Have these kinds of thematic ETFs, thematic actively managed funds, seen any changes in interest in this current environment?

TODD ROSENBLUTH: Well, interestingly, despite the fact that ARKK, A-R-K-K, underwent some performance challenges within the past year, we've seen investors stay highly loyal. And in fact, we've seen money continuing to move in, in 2022. And that's been rewarded. We saw ARKK have a very strong week. Last week from a performance standpoint, there is a range of other active thematic ETFs that are warranted.

We've noted in a piece earlier today that GINN, which is a Goldman Sachs product, DTEC, which is an ALPS product, D-T-E-C, there's a wide variety of these products for investors that want the benefits of thematic long-term strategies, and to have differentiation between what you get in the S&P 500 or even the equally weighted S&P 500 Index-based products.

EMILY MCCORMICK: All right, Todd Rosenbluth, ETF Trends head of research, thank you, again, so much.