Advisors are worried about a lot of things, but they have plenty of opportunities to use ETFs to help their clients navigate whatever the markets may throw at them. That’s the takeaway from the last panel of the first day at the Exchange conference in Miami Beach, Florida.
Taking place at the Fontainebleau, the Exchange is a massive new ETF conference focused on the “exchange of ideas.” The conference officially kicks off Tuesday, April 12, but Monday featured a handful of educational panels and one panel dedicated to advisors and how they are navigating the current market environment.
Tom Lydon, CEO of ETF Flows, moderated the advisor session, which included various survey questions that were provided to advisors, as well as the resulting answers. A group of self-proclaimed “ETF Nerds” provided color commentary on the results.
The panel kicked off with a window into advisors’ expectation of stock market returns. About 60% of advisors who participated in the survey believed that the S&P 500 would be rangebound, fluctuating at only a 10% trading range, over the rest of 2022. That didn’t surprise Eric Balchunas, ETF analyst at Bloomberg.
“Rates rising obviously hurts growth stocks, but it really hurts bond funds,” he said. “And I think people are rotating out of bond funds, but there’is really not much else to do, so they are buying equities because TINA [there is no alternative],” he said. Balchunas noted that flows into equity ETFs are tentative, but positive. Investors are basically saying, “I’ll buy more IVV, VOO and SPY; what else am I going to do?”
Todd Rosenbluth, head of research at ETF Trends, and Dave Nadig, financial futurist for ETF Trends, agreed that a rangebound market is more likely than a bear market.
“The market is up more often than it is down. If you’re a long-term investor, then if it falls more than 5-10%, then that’s a buying opportunity.” explained Rosenbluth. “Money is sticking with ETFs, despite what’s going on with the overall marketplace. We’re going to get $800 billion of net inflows, with the stock market and the bond market down. That’s impressive in a down market.”
Nadig concurred: “I think part of the reason we’re not going to go down more than 10% [in the S&P 500] is because there’s going to be $600 billion of flows coming in from the ETF community, supporting equity prices.”
There are always plenty of things for advisors to worry about, but at the present time, the survey suggested that advisors are most concerned about rising inflation and interest rates, closely followed by geopolitics. That’s understandable, said ETF Trends’ Rosenbluth, but that thankfully, there are plenty of ETFs available to help.
“The beauty of the ETF space is they’ve found ways to help advisors who are worried about rising interest rates and are worried about inflation. We’ve seen a number of successful products that have come to market,” he noted.
“The Horizon Kinetics Inflation Beneficiaries ETF (INFL) is an example of one of those products that came to market last year and is an inflation beneficiary.” Rosenbluth added. “You don’t have to just protect against inflation; you can actually try to find the winners that are out there. The AXS Astoria Inflation Sensitive ETF (PPI) is another product in that category.”
Ben Johnson, director of global ETF research at Morningstar, was a bit more skeptical that ETFs were a panacea for the ills of inflation.
“The best time to protect yourself against a multidecade spike in inflation is before the multidecade spike in inflation has happened,” he explained. “Now we have an ETF for every 'flation' you can think of; we have inflation ETFs, we’ve got stagflation ETFs, we’ve got deflation ETFs—all of which can be perfectly good tools—but you’ve got to be out there mending the hole in the roof of your house when the sun is shining, not in the middle of a downpour.”
Meanwhile, Elisabeth Kashner, director of ETF research at FactSet, argued that higher interest rates could actually be an opportunity.
“Even if Ben is right [and it’s better to act preemptively against inflation], I think we forget that bond funds will take a price hit straight up, and so you’ll see a hit to your balance sheet,” she said. But on the flip side, you do get a higher coupon going forward, and your future total returns will be that much more robust. So, if you missed the correct ‘flation’ play, you’ve got a little bit of an uncomfortable conversation with your client right now. But six to nine months from now, you’re going to start to really appreciate [higher rates].”
Managing Downside Risks
Managing client portfolios is never easy, but during times of high volatility, the job only gets harder. Fortunately, ETFs could help with that.
“When I talk to advisors about how they’re managing volatility, a lot of them are reassessing diversification from the get-go; they’re asking ‘do I actually have enough different sources of return in the portfolio?’” said Nadig.
“There’s some really interesting work done by WisdomTree related to the WisdomTree U.S. Efficient Core Fund (NTSX),” he noted. “It’s their 60/90 product that gives you a 60/40 portfolio—levered up; not to take more risk, but to be able to allocate more to alternatives.”
Nadig added: “There are so many interesting products coming out to provide those different patterns of returns. The Simplify Interest Rate Hedge ETF (PFIX) just launched, which is a direct play on rising interest rates. It’s an interesting way to balance out your long bond portfolio.”
Portfolio Fit Matters Most
The panel finished off by looking at the question of what characteristics advisors place the most emphasis on when selecting an investment strategy for their clients’ portfolios. The results pleasantly surprised some of the panelists, including Rosenbluth.
“This is so exciting to me,” he said. “We’re an industry that looks to ‘race to the bottom’ on cost; we’re an industry that’s historically looked at past performance to buy something, and yet those two categories [were less important to advisors than portfolio fit and methodology].”
Follow Sumit Roy on Twitter @sumitroy2