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Best ETF investments amid election uncertainty

Yahoo Finance's Akiko Fujita and Reggie Browne, GTS Principal, discuss which ETFs may be better investments amid election uncertainty and a possible Biden-Harris win.

Video Transcript

AKIKO FUJITA: It is now time for our ETF report, brought to you by Invesco. Inflows into ETFs have jumped 40% so far this year. Investors plowing in more than $488 billion into funds in the first nine months of this year. So how should you be positioning yourself, especially with the expected volatility around the presidential election next month and uncertainty around the economic recovery?

Let's bring in Reggie Browne. He is the [? GTS ?] principal. And Reggie, it's great to have you on today. Let's just start by talking about this growth that we've seen in ETFs, a 40% jump so far this year. What do you think's led to that growth?

REGGIE BROWNE: Well, thanks for having me. I think largely, ETF, the structure is a choice vehicle for younger investors. So we're seeing more use by new and experienced investors to express their views. So that's number one.

Two, the adoption of fixed income ETFs have been all the rage. 50% of all flows go to fixed income ETFs. And I think it's helped gain exposure in the bond market pretty easily. I mean, the bid ask spread of fixed term ETFs are pretty cheap for exposure and compared to underlying bonds. And I think that's driving the flows.

But look, $4.7 trillion in ETFs. Some have forecasted that he ETF industry will go to $25 billion in 10 year-- trillion in 10 years. You know, it seems like we're on that track.

AKIKO FUJITA: Let's talk about the expected volatility around the election. I mean, we've heard a number of scenarios, but all of that just kind of leads to the uncertainty around the outcome there. And you've talked about ETFs offering a buffer for some of these investors, who maybe are thinking to set aside some cash. What are some ETFs that you think investors should be looking to right now, those who are particularly concerned about the volatility?

REGGIE BROWNE: Well, look, ETFs do not offer a principal protection, you know, but you can express your views using ETFs. I believe that if there is a Biden-Harris win, you know, the marketplace will reprice itself.

And some ETFs will become more important in a Biden administration, such as ETFs around healthcare, clean energy, infrastructure, consumer discretionary, particularly around Amazon, natural resources, and just, overall, just, the rebalance needed to express the new administration.

If the Democrats win the White House and the Senate, you know, I believe that will be a big reprice in the marketplace with the need to restructure a portfolio.

And so if you have-- if there is some-- going to be some expected volatility, which there may, if the election is contentious and becomes an event for litigation, you know, the market will whip around a little bit. But, you know, it's best for long-term investors to stay long-term and sit out the short-term volatility.

AKIKO FUJITA: What about investing in bonds, particularly corporate credit? That's an area where we've seen some huge growth there. How do you think investors should be looking at that right now in terms of positioning?

REGGIE BROWNE: While the largest growth in investment grade is triple B or B series-- and I think you're seeing a lot of new issuance. I think 45% of all new issuances is rated that way. You know, it's easy to get exposure across several different bonds using ETFs and to pick for cap structure or any other first position the individual bond.

I think the best way of looking at it is using a broad-based ETF, like BND from Vanguard, and invest in the entire investable index. And the way that it's priced in the market is pretty competitive. So I think the best way to look at bond ETFs is understand the characters of the bond market, and then look at the ETF wrapper, see how it's behaving.

You know, back in March, bond ETFs didn't perform well compared to the underlying corporate bonds. The underlying corporate bonds were mispriced and behaved badly compared to ETFs. And that just needs for a change around market structure for corporate bonds.

AKIKO FUJITA: And Reggie, you were talking about some of these ETFs that could potentially be beneficiaries on the back of what could be a Biden-Harris win. And I thought it was interesting. In your note, you talked about the potential of crypto ETFs that could play out with a Biden win.

I mean, how are you thinking about that? You know, we talk about volatility, and certainly, that's sort of been the expectation around cryptocurrencies.

REGGIE BROWNE: Well, I think that the commission put out a series of points, what has to happen in order for a crypto ETF to be approved. And there seems to be some advancements to there. I think this current FCC Commission, you know, they're very risk averse and conservative, looking at, particularly, retail investors.

But I think that if there's a change over administration, I think some advancements will occur where crypto ETFs will probably be approved in the United States. It's been a long road for that segment.

You know, almost-- I can think almost eight years that some have been trying to get approved. And it feels like it's getting closer. And particularly if there's a change of administration, I think that a new FCC commissioner and commission may approve it.