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ETFs: Consumer staples and discretionary 'had a flipped year' in 2022, expert says

VettaFi Financial Futurist Dave Nadig joins Yahoo Finance Live to discuss buying opportunities in the tech sector.

Video transcript

- The tech sector, ending the day high, are on some positive earnings results from Microsoft and Alphabet. And Meta popping in after hours trading after beating on the top and the bottom line, a pretty solid beat. Check out shares, up more than 12% after hours. Tech been on a wild ride so far this year with double digit gains for some of the biggest players. So how can you position your portfolio to ride the highs of these stocks? For that, we turn to Dave Nadig, VettaFi financial futurist as part of our ETF report brought to you by Invesco QQQ. Good to see you, sir. You heard the question. How can you ride this wave?

DAVE NADIG: Well, it's been a really fascinating thing to watch because I think we've got this bifurcated market. There's part of it that is driven by consumers. And when we're talking about the tech story, it's really a consumer tech story. The big tech spends on things like CapEx investment, we're not seeing those kinds of big top line earnings hits that we'd love to see. We're seeing Microsoft, Apple, Google, Meta, those are where the action really is. Those are consumer technology plays of a sort.

And that's where we've seen a lot of the activity. If you look at across different sectors, we recently at VettaFi picked up a company called Logically which lets us dig down into the portfolios of ETFs and figure out what's driving their returns, the biggest winner this year has been QUAL, which is the iShares quality factor ETF. When you look at what it holds and what's driving the pattern of returns in it, it's communication services, it's technology companies, it's better picks in the consumer discretionary space. That's what's driving these funds to gain assets, but also to beat the market. QUAL is beating S&P by about 1.5% so far this year.

- Dave, do you think that momentum, though, can continue? And how much of it is a result of all this hype around AI? Meta reported tonight and it was in their second line of this release.

DAVE NADIG: Well, I think AI is a lot more real than it is hype, even how much hype there is. Not because we're all going to go buy something with AI on the label and we're going to spend a lot of money. It's going to allow businesses to really change how they do business in a positive way. It speeds up time to market, it speeds up product development, it makes marketing better and more targeted. There are real use cases here that are driving real flows.

- When it comes to some of the other sectors that we have heard from so far, the consumer staples stocks have reported over the last week. We heard from PepsiCo, Coca-Cola, Procter and Gambel, just to name a few. How are you looking at investment opportunities within that sector?

DAVE NADIG: Well, it's worth pointing out that staples and discretionary had a really flipped year last year where staples did quite well, discretionary really took it on the chin. That's flipped around a bit. Staples is actually dragging down the S&P so far this year. Discretionary is really leading.

But even saying that, if you look inside the staples earnings reports, we see a consistent theme of price over volume, meaning everything from Tootsie Roll to Kimberly-Clark to Pepsi seems to be able to pass not only their increased costs onto consumers, but to juice their margins along the way. We've seen no evidence yet that the average consumer is pulling back their spending just because prices are up.

- You don't see the beginning of some consumer pushback saying, OK, this might be our tipping point? We've started to see some commentary in quarterly earnings reports that suggests that's just beginning to appear.

DAVE NADIG: I mean, I think people should be concerned about that. Prices won't be inelastic forever. At some point, the consumer will respond. What we're finding out is, there was room to raise prices and that's what companies have done.

- And so how do you benefit-- how do you invest off of what you're seeing from the consumer?

DAVE NADIG: Well, I think the kinds of stocks that you're in matter. If you look at the kind of flows that we've been watching at VettaFi, we're seeing a ton of focus on what I would call safety plays but still in equity. Whether it's things like QUAL, which has pulled in a lot of money, or the JPMorgan equity and premium income fund, JEPI-- I think it's the second or third largest growing fund this year so far-- dividend strategies, like the Schwab dividend fund, SCHD-- all pulling in good flows for good reason. They're investing in the companies that are most benefiting from this price over volume mix or by being in the right place at the right time, owning, for instance, a lot of Meta.

- Are you seeing-- we ask this probably too much-- is there any sign at all of a recession? Or is it complete lack thereof? We've got a tight labor market and-- I already cut you off. Go ahead.

DAVE NADIG: No, no, no. It's all good. I think there are concerns, but I think the concerns are mostly on the corporate side, not on the consumer side. I'm worried about things like the credit crunch actually clamping down on CapEx. I'm worried about business growth. Those things can really hurt the economy. But the core S&P 500 companies can actually do pretty well while we're still in a recession in other parts of the economy.

That's a bit of a bifurcated market. It's not something we see very often, but that's the kind of recession I think we're headed into if it is a recession. If the consumer gets really spooked and starts keeping all their money in money market funds because we don't use banks anymore apparently, then we should be concerned. But we really don't see it in the sentiment numbers or in the actual volume numbers.

- AAA said international travel is up 300%. I say the consumer's doing all right.

DAVE NADIG: Yeah, travel, services, across the board.

- Remarkable. Dave Nadig, good to see you, sir.

DAVE NADIG: Thanks for having me.

-Thanks so much.