ETFs Rallying on Depends on Fed, Earnings

While exchange-traded fund investors are enjoying a recent and long-awaited bounce, other factors are shaping up that will influence whether or not the rally continues. 

The industry’s outlook for 2023 remains unclear as a key factor that will determine where and how market and investor interests will pivot is the Federal Reserve’s pending decision on opting for a 0.50% hike versus a 0.75% hike. 

ETF growth in the three months leading up to Nov. 11 was largely propelled by funds focused on riskier investments like U.S. small caps, emerging market equities and high yield corporate bonds, according to the Center for Financial Research and Analysis. After the Nov. 10 report showed less-than-expected inflation, funds in cloud computing, retail and gig economy companies surged, the report said. 

“After the inflation numbers were released, we [saw] investors get back into higher growth and high beta sectors,” CFRA’s Head of ETF Data and Analytics, Aniket Ullal, wrote in an email to ETF.com. He also cited internet and fintech as areas investors moved into at that time. 

Earlier in the year, as markets slid, “investors rotated into themes that protect downside and give them more of a cushion,” he wrote.  

At the start of the three-month period, investors selected defensive strategy ETFs: those focused on currencies, buffered outcome and Treasury bonds, CFRA said. 

Funds that benefited most from the softer-than-expected inflation focus on growth. Among them were two from Cathie Woods’ ARK Invest: the firm’s flagship fund, the ARK Innovation ETF (ARKK) and the ARK Next Generation Internet ETF (ARKW), followed by Mirae Asset Global Investments Co.’s Global X MSCI China Real Estate ETF (CHIR). 

Recent market gains may be temporary, Ullal wrote in his note. The Federal Reserve’s December interest rate decision, as well as earnings and consumer spending, will shape the market, he said. 

The long-term outlook is uncertain, “and it is not clear that this rally signals a true market bottom.” 

Still, Ullal believes cybersecurity to be a corner of thematic investing that promises high sector growth in the future, despite cybersecurity ETFs being down 20% to 25% this year. However, he said specific stock and ETF performance would be dependent on an individual company and respective market conditions. 

Contact Zoya Mirza at [email protected]