ETF market saw ‘nearly record inflows’ in 2022, expert says

VettaFi Financial Futurist Dave Nadig joins Yahoo Finance Live to review the year in ETF markets, expectations for 2023, and the best and worst new ETFs to pay attention to.

Video Transcript

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DAVID BRIGGS: 2022 was a big year for the ETF market, with estimates putting new assets at over $600 billion, $50 billion in the last week alone. To discuss, we are joined by VettaFi Financial Futurist Dave Nadig for this ETF report sponsored by Invesco QQQ. Good to see you, sir. You have some hidden gems from 2022. Where were they? What were they-- what and where were they?

DAVE NADIG: Well, we had over 400 launches this year, which I think is probably a record. That's not a stat that we keep a lot of tight track to but nearly record inflows, second really only to last year. A couple of funds that jumped out to the team at VettaFi when we started kicking around sort of new launches of the year that we wanted to make sure we highlighted, I'll start with one which is also one of my picks for next year, which is the Fairlead Tactical ETF.

This is TACK is the ticker here. And it's a fairly easy fund to explain. It's a sector rotation strategy. So on any given day, it may be out of energy and into financials, uses a traditional technical analysis model run by Katie Stockton, a really well-established quant in the space. And this fund is already beating the S&P since it launched in March by about 10%. That's pretty great for a strategy like this.

It's a whole in the marketplace. There are not a lot of these actively managed technical rotation type strategies out there. So that's been a big one. And that fits in a world of equity ETFs that, honestly, got a little wacky at times this year.

I mean, this is also the year we got the KPOP Korean Entertainment ETF. We got the HAPY, the Harbor Capital Corporate Culture ETF. So a lot of interesting launches out there. I think TACK is a really interesting one that could find its way into a lot of portfolios where people are looking for something that's a little bit more active.

SEANA SMITH: Dave, what are you hearing just from advisors in terms of their outlook next year and whether or not they're more optimistic given the fact that there still is so much uncertainty?

DAVE NADIG: Well, honestly, I think advisors are a little less optimistic than consumers. We've had some good improving consumer sentiment numbers. The advisors we talked to are still positioning defensively. Now, that doesn't mean they're running the cash, although we've had record bond inflows over the last year.

What it means is they're looking at the equity portion of their portfolio and looking to add either a quality spin to it, a value spin to it, or, increasingly, a dividend and income generation spin to it. I'll highlight JEPI, the JP Morgan Equity Income Fund, one of the best-performing and highest asset-gathering funds over the last year. But that lives alongside really traditional things like SCHD, which is Schwab's Dividend Strategy, the fifth-largest asset gathering fund this year, and it's pretty dirt standard buying dividend-paying stocks.

That's a really interesting way for people to get a little bit more defensive than they might otherwise. We recently had a pretty interesting ESG spin on that, the SNPD, which launched pretty recently, I think just in November, for folks looking to do something a little ESG with their dividend strategy. But a lot of advisors positioning for that cautious but not running to cash portfolio.

DAVID BRIGGS: Dave, how did geopolitics impact your outlook for '23

DAVE NADIG: Well, you know, I think we have to acknowledge that this has been a crazy year for the US versus the world when you think about investing. The run-up we've had in the dollar has made it really tough to be internationally diversified. But good advisors, smart portfolio managers recognize that a core piece of your portfolio needs to be an international exposure.

How do you do that with the geopolitical stage as chaotic as it is? Two funds I'd look out-- out right there. One is if you're looking for traditional sort of developed markets exposure, I'd look at DMCY. It's the Democracy International Fund. What this does is it reweights the global markets ex-US based on how democratic they are. That's actually turned out to be a market-beating strategy for asset-- for the developed part of the market.

And for the emerging markets part, we've had a great fund for a few years here, FRDM. It's the Freedom 100 Emerging Markets ETF. It's actually beaten the pants off pretty much anything looking at emerging markets because it's avoided China, and it avoided Russia going into the war. So both ways to think about your international exposure and maybe avoid some of the worst geopolitical concerns.

SEANA SMITH: So, Dave, we know what you like. We know where you're seeing opportunity for next year. If you had to tell investors one sector or maybe one fund that they should avoid or maybe now's not the time to buy in, what would that be?

DAVE NADIG: I think you need to be skeptical of TIPS products right now. Now, TIPS themselves can be interesting. We're at a point now where I think the 10-year breakeven's about 2 and 1/2%, meaning that inflation has to really run hotter than that for 10 years for it to pay off. That seems like a reasonable bet to a lot of people.

The problem is TIPS in a portfolio of other bonds can be really problematic. So if you're looking for inflation plays, I'm not sure you should be looking at the bond market based on what we've got going on over the next year. I'd be looking at things like more cyclical equities, maybe rolling back into some of the parts of the market we expect to respond positively to continued inflation. That could be things like financials, for instance, which have been benefiting from the higher rates.

SEANA SMITH: All right. Great advice there. Dave Nadig, always great to have you on, of VettaFi Financial Futurist.