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ETFs as an asset class ‘have held up wonderfully’ amid market volatility: Financial futurist

Dave Nadig, a financial futurist for VettaFi, joins Yahoo Finance Live to discuss the ETF space, how investors should position their portfolios, and how Tesla was booted from the S&P 500's ESG index.

Video Transcript


DAVE BRIGGS: The S&P 500 on-pace for its worst initial 100 days since 1970. How are ETFs faring amidst the carnage? And how is investor behavior changing amidst all that? Dave Nadig is a VettaFi financial futurist. He joins us as part of our ETF Report brought to you by Invesco QQQ. Nice to see you, sir.

The NASDAQ has popped today. It's nice to see an up day, up about 2%, but down 27% year to date. How is it impacting ETFs in general?

DAVID NADIG: Well, in general, ETFs as an asset class, as a structure have held up wonderfully. I think it's inevitable that when we have downturns like this however, investors look to change things in their portfolio.

We spend a lot of time talking to financial advisors at VettaFi. We did a poll just last week, asking financial advisors how they were adjusting their client portfolios. And surprisingly, over half of them said they were looking to get into alternative asset classes, something other than just more stocks, more bonds, or just looking to go to cash.

51% said they were looking to move into an alternative asset class, which frankly, we found surprising.

SEANA SMITH: Dave, any idea just in terms of, within that alternative asset class, where they're finding opportunity right now?

DAVID NADIG: Well, there have been a couple of different approaches there. One thing that we've heard a lot of advisors getting excited about is this idea of return stacking. This is something that really was sort of brought to light by a newfound guy named Cary Hochstein and the folks over at Resolve Asset Management.

And the idea is to use something to give you a little bit more room in your portfolio so that your diversification can really matter. The ETF that a lot of folks are using for this is the WisdomTree capital efficiency ETF NTSX. It's effectively a 90-60 portfolio, 90% stocks, 60% treasuries, using futures to give you a little bit of leverage, not to take more risk, but actually to create room in your portfolio to put a little bit less into that 60-40 so you can open yourself up for true alternatives.

On that alt space, the commodities have really been the go-to. We've seen a lot of flows on a lot of interest in particular in Invesco's Optimum Yield Diversified Commodity ETF, which is PDBC. It's up about 35% this year. And that's really been a core allocation.

Another thing we've been looking at that's really interesting is a managed futures approach, an actively managed approach that can look at things like going short the yen or short the euro through futures. The fund there is DBMF, the IMGP DBI Managed Futures ETF. It's up about 21% this year.

Both are going to give you non-correlated returns, and that's really the most important thing when you're building for a long-term portfolio.

DAVE BRIGGS: Dave, you referenced there the 60-40 rule, which appears to be no longer, in most cases. Younger workers, according to recent research, portfolios are now up to 92% stocks, while mid-career workers saw the biggest jump. And it was a huge, one from 69% to 82% stocks. What is your takeaway from that? And is the 60-40 rule just no longer?

DAVID NADIG: Well, I think it's been an era of, there's no alternative. For the last decade, you really kind of wanted to be in-- or at least the last couple of years, you really wanted to be in equities. There weren't a lot of places to get even yield. Just dividend strategies have been the primary yield vector for folks. So I understand how we got there.

I think over the longer term though, what we're seeing is that folks are going to come back to a more diversified approach, whether or not 40% is the right bond allocation. It's been very clear in this last quarter that having some bond allocation really can work for you. And as we start going into a rising rate environment, it actually makes sense to start legging in as those higher coupon rates become available.

So I don't think we're going to be running back to a 1970s-style 60-40 portfolio anytime soon. But the idea of getting that extra diversification, I think a lot of investors are learning that lesson the hard way right now.

SEANA SMITH: Dave, what do you make of the cash piles? Because Bank of America was out with a recent survey saying that the cash piles right now are at levels we haven't seen since 2001. Is that true with what you're seeing as well? And when is the best time to put some of that money to work?

DAVID NADIG: Well, I think it's a terrible idea to try to call the bottom or the top in any market. That never works. I think the right approach, if you do have a cash pile, as you put it, money sitting on the sidelines as Wall Street always says, the thing is to get that to work on a consistent basis. Don't wait for a single entry point. You'll always be wrong.

Human beings are terrible market timers whether they sit on Wall Street or they sit on Main Street. Get that money to work over time, whether you're doing it through your 401K or whether you're legging in as the market's going down. It's the best time to be a buyer.

DAVE BRIGGS: Gotta get you to weigh in on the latest with Elon. As you know, called the S&P's ESG index a scam and called it a lot of other things that we can't say on television after Tesla was given the boot from their index. What does it mean for Tesla? And what does it mean for the index moving forward?

DAVID NADIG: Well, I think it's important to remember that ESG has three letters in it, not just one. And I think his concern was, well, we're getting booted out, and we're supposed to be this environmentally go-forward company that's going to change our electric grid. I think that may all be true, but there's also an S and a G.

And the social part has to do with how you're treating your employees. And the governance part often has to do with how well you're managing your company, what your regulatory environment is, what your lawsuit situation looks like. All of those things have been going the own way for Tesla for months.

And so to get kicked out of an ESG ETF makes a lot of sense, to get kicked out of purely a net-zero impact ETF focused only on the environment, maybe he'd have a point. But ESG funds are not one-size-fits-all. You've got to look under the hood.

SEANA SMITH: All right, Dave Nadig, VettaFi Financials futurist. And thanks so much for joining us.