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ETFs: ‘Investors are looking at equity income in a different way,’ strategist says

CFRA Head of ETF & Mutual Fund Research Todd Rosenbluth joins Yahoo Finance Live to discuss investing amid rate hikes, value and dividend growth funds, and the outlook for ETFs based on bitcoin futures.

Video transcript

KARINA MITCHELL: Welcome back to Yahoo Finance. It's time now for our ETF report, brought to you by Invesco QQQ. ETF inflows in continued momentum into the start of this year. Here with which ones are gaining traction, let's bring in Todd Rosenbluth, out of ETF and mutual fund research at CFRA. Todd, thanks so much for being here. So investors poured a record $7 and 1/2 billion into dividend ETFs in January, square alone. How do you square that with the rotation we're seeing in equities?

TODD ROSENBLUTH: So what we're seeing in the equity space is either investors are rotating towards more value-oriented strategies and companies that are paying dividends and consistently paying dividends, or having an above average yield would fit into that camp. But we're also in a potentially rising interest rate environment.

And because we're in that environment, investors are looking at equity income in a different way than they might have beforehand. You could have gotten exposure to the S&P 500, the broad market, and paid a dividend that was above average what you'd get in the 10-year Treasury. Now you have to look for more dividend-oriented products to be able to get exposure to those above average yield.

KARINA MITCHELL: So when you're looking at dividends, there are two broad categories, right? There's growth and there's high yield. So what should investors know about the differences between both of those?

TODD ROSENBLUTH: Right, so dividend yield oriented ETFs tend to be more defensively slanted. You'd have higher exposure to consumer staples, utilities, in some cases, energy, because of how the stock prices have fallen, whereas dividend growth oriented ETFs have more exposure towards cyclical sectors. You'll find industrials, you'll find financials. In some cases, you'll find technology.

If we look in a shorter period of time of dividend track records, so an ETF like VIG, Vanguard Dividend Appreciation ETF, has a healthy weighting within the technology sector, whereas an ETF like SDY, which is a SPDR S&P Dividend ETF, which looks for 20 years of dividend growth, it's not going to have companies such as Microsoft that have been raising dividends for 10, but not yet 20 years. So you really need to look under the hood and make sure you understand what you're getting, even if you're focusing on dividend growth, as opposed to dividend yield oriented products.

KARINA MITCHELL: I'm wondering, it's a challenging year ahead. So what if companies start to pull back on the dividends they offer? What are you advising clients? And then what about duration as well?

TODD ROSENBLUTH: Right, so companies that have raised dividends don't perpetually raise dividends. We saw AT&T cut their dividend. They actually stopped paying or stopped raising the dividend in 2021. And then they cut it in 2022. So stopping raising it is certainly a sign that there's something at risk. You want to look for companies that are growing their earnings that are likely to be able to continue to grow their dividends. So those go hand in hand. A company's board and management is less likely to have confidence in the longer term earnings prospects, and yet raise the dividend.

So if you're looking for companies that you find within NOBL, which is the ProShares Dividend ETF, or SDY, that State Street product, or VIG, look at the companies inside and look at their earnings prospects, which is something that we're doing with our research to understand if these are good, average, or bad ETFs.

KARINA MITCHELL: And then you also like some value ETFs as well. But you say look inside those as well, because it's important to know some of the differences, because there can be a disagreement about what constitutes a value stock, right?

TODD ROSENBLUTH: That's right. So the two leading value oriented ETFs are the iShares Russell 1000 value ETF and the iShares S&P 500 value ETF. You can tell they're different because they've got a different index name, constituents that are part of it. The iShares S&P 500 Value ETF, IVE, has companies like MasterCard and Visa, where you wouldn't find that within the Russell 1000 Value ETF.

So not surprisingly, since those are technology companies, you'll get more exposure to the tech sector with IVE than you would get with the iShares Russell 1000 Value ETF. And I see we're showing on the screen here the performance. These are not going to perform in line with one another, because they're constructed differently. So even though value ETFs have been particularly popular to start 2022, it does matter what ETF you're choosing and the index partner that they're working with.

KARINA MITCHELL: Hey, Todd, really quickly-- I only have a few seconds left, but new Bitcoin ETF from Valkyrie coming on the market today. How coincidental it comes just ahead of the Super Bowl, where there's so much interest in crypto. Do you see more interest in crypto ETFs coming down the line this year?

TODD ROSENBLUTH: So we've seen relatively strong interest in that investors have stayed loyal to the Bitcoin futures-based ETFs like BITO from ProShares. The Valkyrie product you're talking about is a Bitcoin miner ETF, so these are owning companies that are exposed to the Bitcoin space. We're certainly seeing supply for that. I think there's overall demand, but obviously, we haven't seen the performance in 2022 to back that up.

KARINA MITCHELL: OK, we will leave it there. Todd Rosenbluth, head of ETF and mutual fund research at CFRA, thanks for your perspective today. Alexis.