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$11B-$12B flowing into tech ETFs so far this year: ETF trends

Yahoo Finance’s Akiko Fujita and Director of Research for ETF Trends Dave Nadig discuss the latest inflows into ETFs.

Video Transcript

AKIKO FUJITA: It is now time for our ETF Report brought to you by Invesco. Today, we're taking a look at Sector ETFs at $30 billion in funds are flowing into sector funds so far this year. So where are the winners and losers? Dave Nadig is the CIO and Director of Research for ETF Trends, and he joins me now to break that down for us. So Dave, let's just talk about sector rotation as a whole. We've certainly seen a lot of funds [INAUDIBLE] money flowing into a sector ETFs. Where are you seeing the real opportunities?

DAVE NADIG: Well, so the money has been chasing a few very small pockets. I don't think it would be any surprise that technology is captured a lot. About 11, 12 billion has flowed into tech ETF so far this year. That doesn't count money that's flowed into things like the Q's, which are often a proxy for technology as well. So people are definitely chasing a little bit of the performance, a little bit of that, you know, what are the recovery play strategy.

We've also seen some decent flows in the things like consumer discretionary, which is where a lot of those online shopping names live and so on. But interestingly, energy, which is down, last time I checked, 46% for the year, has actually had about $5.5 billion in inflows. So there's an interesting combination here of people trying to sort of make these tactical rotation plays into what they think is going to work. But at the same time, trying to buy the dip. Really, there's no other way to talk about it like that.

AKIKO FUJITA: So what should be the strategy moving forward? I mean, we were talking with our guest, Kathy Entwistle, earlier today about this rotation from growth into value, which is kind of traditionally held, and yet, she was saying even with growth, you kind of have to be discriminatory in terms of which growth stocks are better than others. If we're talking about passive investing, tech still is up 23% on the year, so is there a case to just stay in that if you are investing in the long term?

DAVE NADIG: Well, so sector investing is a really interesting corner of the market, because it's where sort of tactical trading, trying to really take advantage of say a one or two or three week move, meets longer term investing, because a lot of, say, financial advisors will use long term sector rotation strategies as a way of actually smoothing out their market exposure. I think what we're seeing here is both things happening at the same time. I think the most interesting corner is probably what we would call thematic ETFs, which are ETFs that break the traditional sector barrier, right, real estate, materials, industrials, and look across those sectors to match up with a particular theme in the market.

So we've got a rash of these products that are pulling in huge money right now, whether that's something like ARKs, genomics, ETF ARKG, which is obviously going after sort of COVID plays, vaccine plays, therapeutics, or things like work from home, direction launch to work from home, ETF WFH, which combines things from the retailing space and the tech space. So that's a really interesting place where I've seen people making more long term bets that really position themselves for 2021 and the years to come.

AKIKO FUJITA: Let's talk about another topic that I think has been on the minds of a lot of our viewers, and that's retirement investing. There's been so many questions about where you should keep your money, especially if you are retiring at least in a few years or so, given just the volatility in the market. You know, you point out with rates at zero for pretty much several years here. And now, there are other areas for income, for returns that maybe retirement investors should be looking to.

DAVE NADIG: Yeah, traditionally you would look to something like a bond ladder. That's not going to help you very much right now, or you'd just be buying dividend stocks. That's looking a little hard to stomach right now, too. A lot of people are concerned about whether traditional dividend players are going to be able to continue to do that and fund people in retirement. So what we've seen is a bunch of new products coming to market that extract income from the equity markets in different ways. Probably an interesting case in point here would be the nationwide risk managed income ETF-- it's ticker NUSI-- and what that does is it buys the NASDAQ 100. It actually owns all of those stocks.

But then what it does is it uses some covered calls to generate income from that long position that you can then get and use and spend if you're in retirement and protects you by also buying some put. So it takes this very volatile index, the Q's, and it compresses it so that you actually extract income and manage your risk. And this is part of a wave of products we've seen that sort of reach into different asset classes or reach into the options markets to really try to solve what is a very real problem for a lot of investors facing retirement.

AKIKO FUJITA: So how should investors be looking at asset allocation on that front? If it really is about retirement, and you're looking at retirement let's say 10 years down the line, is this now the time to look at these funds that you just highlighted, or is it a safer bet to stay in any kind of ETF that has given you maybe not significant return, but at least a steady return?

DAVE NADIG: Well, I think we have to differentiate here between yield, which is something that retirement investors are often looking for, because they don't want to have to be structurally selling their equity all the time, and total performance, right? So a lot of these products are designed to change the returns into an income stream. If you're still looking 10 years out for retirement, you're still in your accumulation phase.

You're not trying to draw anything down, and that should really just be the normal math you would do about your risk versus reward. Now, that's a tough one as well, because I think we all understand a 60-40 portfolio this year is not going to look like a 60-40 portfolio 20 years ago, not when you can project those returns on the fixed income portion to be effectively zero or possibly even negative if we get a bit of an inflation spike on a real basis. So it does drag people more into the equity markets, and that's why a lot of these products that manage that risk a little bit, I think, will be attractive.

AKIKO FUJITA: Dave Nadig, Director of Research for ETF Trends, always good to talk to you.

DAVE NADIG: Thanks for having me.