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2023 is the year for fixed-income ETFs: Expert

U.S.-listed ETFs saw a net inflow of just over $200 billion in the first half of 2023, while fixed-income ETFs gathered 49% of new money in the first half of the year. Todd Rosenbluth, VettaFi Head of Research, joins Yahoo Finance Live to discuss the success of fixed-income ETFs and how investors can benefit.

Video Transcript

- Well, 2023 has been the year for active ETFs. According to VettaFi, US-listed ETFs saw a net inflow of just over $200 billion in the first half of 2023. But fixed income ETFs punched even higher above their weight, gathering 49% of new money during the first six months of the year.

As part of the ETF report brought to you by Invesco QQQ, let's bring in VetaFi, head of research, Todd Rosenbluth, to discuss more. Good to see you, Todd. So break this down for us. In terms of this inflow that we've seen into fixed income, who have been the big winners in that space?

TODD ROSENBLUTH: Well, we've seen a lot of money move into fixed income because of the uncertainty in the interest rate environment, uncertainty related to the economy. IShares has been a big beneficiary of that. They've got the large-- or the most popular of the ETFs. TLT, which is a 20-year Treasury ETF. We've seen inflows into Vanguard's ETF, which is BND, Vanguard total bond market ETF.

We've also seen strong adoption towards actively managed fixed income ETFs, that you touched on earlier. Firms like Capital Group, Fidelity, those have all, recently, or had success in gathering fixed income ETF assets that are core strategies that are intended to outperform the broader marketplace.

But there's a lot of money still to be moved in. There's a lot of money still sitting in money market accounts. And we at VettaFi think we're going to see a rotation into active fixed income ETFs and fixed income ETFs in general. So much so that we're having a fixed income ETF symposium on July 24 that's virtual, that people can register for at etftrends.com. We really think this is the year of fixed income ETFs.

- And what do you think is going to be that tipping point, then, into actively managed ETFs taking more dominance?

TODD ROSENBLUTH: Well, we're seeing it so far with active equity ETFs, they are really strong this year. We've seen strong inflows into covered call strategies like Jepi, J-E-P-I, which is an equity premium income. We think that as investors are getting more comfortable with fixed income ETFs, they're going to gravitate towards active ETFs.

Investors tend to prefer to run their own equity strategies using an index-based approach, typically with the S&P 500 or the Russell 2000 index exposure, but they lean on active managers to help them navigate the interest rate environment.

We've got a big Fed meeting coming up at the end of July-- that's taking place the same week as the event that we're having at VettaFi, and we really think that investors are trying to figure out how to navigate that. Actively managed ETFs can help investors because they make the decision making put in the hands of professionals instead of just having investors and clients try to do that themselves.

- And is there a risk that some of these fixed income ETFs would be due for a correction, especially as we're not sure what the Fed will do, as they're very data dependent?

TODD ROSENBLUTH: Right. Well, we've seen investors start-- they started off the year focused on short-term and Treasury-oriented ETFs, those less interest rate sensitive higher quality strategies. We've seen a rotation into some of the higher risk investments, high yield or going out the curve and taking on long-term exposure, I mentioned TLT being very popular. If the Fed continues to raise interest rates, that will be a negative towards those riskier assets.

TLT is very interest rate sensitive and will lose money if the Fed continues to raise interest rates. Whereas in actively managed ETF, I see we're showing BOND from PIMCO, and MUSI, which is a American Century ETF.

Those are actively managed, where the managers can shift towards a lower interest rate sensitive approach, if they feel that the uncertainty is greater, or they can, of course, read the tea leaves and rotate towards more active, more higher yielding strategies, high yield investment grade corporates, loans, in order to get more income for investors.

- And Todd, I know that, obviously, fixed income a big one here. What are the other heavyweight ETFs that people should have on their radar?

TODD ROSENBLUTH: Well, we are focusing on the equity strategies as well. One of the more popular ETFs this year is QUAL. This is an iShares ETF. QUAL is how I would pronounce it. Higher quality blue chip companies with strong balance sheets, consistent earnings records. It has technology exposure, which has helped it this year, a nice heavyweight 25% plus in assets.

But it also owns Blue Chip companies in other sectors. It owns Nike, for example, it owns ConocoPhillips in the energy sector. So a more broadly diversified higher quality way of getting exposure to the S&P 500. That's been popular with investors this year. They're looking to take a little of that risk off with cash flow high-quality strategies.

- Well, great stuff there. Appreciate you joining us with your insights as always. Todd Rosenbluth, VettaFi head of research. Thanks so much.

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