ETFs
Why Investors Are Turning to Active ETFs to Overcome Uncertainty
Active ETF investment is on the rise. Cinthia Murphy, investment strategist at VettaFi, joins Wealth! to discuss why active ETFs could be the key to a successful second half of 2024, despite economic uncertainty.
Murphy explains why active ETFs have become so popular: “This year has been a big demand for active ETFs because it’s a time when people are trying to position themselves more actively in this uncertain environment. If you look at the demand for your traditional index-based portfolios, whether they’re in equities or fixed income, it remains strong and really robust, but active management is a bit of a new phenomenon in the ETF space. It’s been around forever, but it never really took hold until recently when more products, better products, and lower-fee products started to emerge.”
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This post was written by Nicolas Jacobino
Video Transcript
Actively managed exchange-traded funds account for 33% of all ETF inflows this year through May.
This is despite the fact that they only represent 7% of all ETFs according to one report.
And our next guest thinks they might be the best option for an uncertain second half of the year.
And to discuss this further, let’s bring on Cynthia Murphy, Investment Strategist for the ETF Report brought to you by Invest QQQ. Cynthia, great to talk to you.
It was great to be here again.
Alright, so explain all this to us.
Why do you think these are the most in-demand active ETFs for the second half of the year?
Hi Brad, it’s been a big year for active demand for ETFs as it’s a time when people are trying to be more active in positioning themselves for this uncertainty ahead.
Um, if you look, you know the demand for your classic index portfolios, whether it’s equities or fixed income, remains strong and really robust, but the asset is a little bit of a new phenomenon in the ETF space.
It has been around forever.
But this idea never really took root until recently, when more, better, and cheaper products began to emerge.
So we’ve seen not only a lot of interesting strategy launches, things in categories that didn’t exist before, like buffer investing or, you know, a lot of equity-based options, income-based options, things that we couldn’t do before.
And a lot of index-based strategies, all of these things exist now and they’re accessible from a price point of view.
And we’re seeing investors really embrace it as a way to diversify their portfolios or look for alternative income strategies or better risk management tools, all of which apply in an environment where we don’t know where this market is going.
The story continues
We were talking earlier with one of our guests, one of our guests, Brian Mulberry, who was talking to us about this flight to quality.
How do we see this evolving in the ETF landscape?
Yes, the flight to quality is interesting because it speaks to feeling.
I recently did a survey where we asked advisors, “What do you think about the second half of the year, whether it’s bullish or bearish?”
And a higher percentage of advisors said they felt more bearish heading into the second half of the year, and then they felt more bullish and you see that expressed in quality demand.
So, for example, if you’ve really been on this growth train and you’re just buying NVIDIA and Microsoft and Apple, and you’re really chasing the Mac 7, and you’re all in it, all of a sudden you’re worried, you know, will they be able to continue to generate these profits?
Can they continue to surprise on the upside or is it time to focus a little more on quality?
So funds like Q Growth, for example, really stand out because you’re staying invested in growth, but you’re really looking for fundamental quality in some of the names that we’ve seen demand for things like, you know, free cash flow companies.
This is a suggestion of a sign of financial well-being.
So funds like VFLOV Flow, you know, or some of your cash cows also stand out in this space.
So the flight to quality has occurred in both equities and fixed income, again as a safety measure and as a defensive positioning in anticipation of what comes next.
You know, we were too and you know, I just have all these little sort of memories of conversations that had some of the very themes that we’re talking about.
But in some broader areas of what thoughtful investors may be going through right now.
And one of them is Garp’s growth at a reasonable price here.
How does this fit into an ETF strategy that someone also wants to deploy?
There are now some interesting funds in this area.
One, the symbol is Garp, the other one, Dapdarp, these are strategies that, again, want to keep you invested in growth.
If growth is your thing, if you’re just thinking about classic growth versus value, and you really want to look at growth, but you’re worried about valuations, I mean valuations are really stretched in the space, but leadership has also been very tight in this space.
So when you go to a place like a garp you tend to find names that aren’t your mag seven.
With such a heavy weighting, you tend to find things that are more, that are fundamentally strong, that are growing businesses, but that haven’t been big headliners.
These are therefore more attractive valuations.
So it’s almost like introducing an assessment screen into your growth game, which is kind of a safeguard.
And that’s something that’s starting to appeal to a lot of people who don’t want to give up on the big growth train because, you know, there’s no indication yet that there’s a break there.
I mean, the growth momentum has slowed, but they want to stay invested in that area.
But they’re just taking a more cautious tone with some of these assessment measures that are introduced there.
Cynthia, it’s always a pleasure to hear your thoughts and thank you so much for joining us here on the show today.
I really appreciate that.
Cynthia Murphy, who is the verified investment strategist who joins us here on wealth.
Thank you so much.
Thank you so much.