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ETFs: Investors looking to bet ‘for or against’ the technology sector, expert says

VettaFi Head of Research Todd Rosenbluth joins Yahoo Finance Live to discuss the ETF space and how much money was invested into actively managed ETFs in 2022.

Video Transcript

SEANA SMITH: All right, making a big bet on the decline in tech. Last week, investors are pumping a record $650 million into the SQQ ETF. Now, that shorts the tech-heavy QQQ. Shares of that ETF today are up just about 4%, as we're seeing some of those larger cap tech names decline.

Joining us now for this week's ETF Report brought to you by Invesco QQQ is Todd Rosenbluth, VettaFi Head of Research. Todd, it's great to see you again. So certainly more and more traders trying to bet against tech stocks, or was the thought out there that maybe the valuations look a little bit more attractive at this point in tech, but maybe we have more downside risk ahead of us here?

TODD ROSENBLUTH: Well, that's the unknown right now. We've seen a lot of money going in and a lot of interest into the short version of QQQ-- the Invesco QQQ ETF that's got growth stocks. You mentioned technology ones, but also Amazon, companies like Alphabet that are in there.

There's a lot of pessimism about the technology and the growth-oriented sector heading into 2023. But there's also been strong interest into TQQQ, which is a three times leveraged ProShares ETF. So investors are looking to bet either for or against the technology sector in general, because there's so much uncertainty, and this has been a down year, and there's gains to be had for investors on both the long or the short-term if you have a very short time horizon. The longer that time horizon, the more risk you take with these leveraged and inverse ETFs.

RACHELLE AKUFFO: And, Todd, talk about what you're seeing in terms of the inflow of funds for some of these inverse ETFs and some of the leveraged ones.

TODD ROSENBLUTH: Yeah. We're seeing really strong interest in this. And on our VettaFi platform, there's interest in getting to know these products, understanding what you get, the exposure, but also understanding the risks tied to that leverage. So this year, which we've had a down year for the equity markets, down year for growth investing through the NASDAQ 100 indexes, investors are willing to take that risk on to go in favor long for that leveraged ETFs, or to go short.

We've also seen a lot of interest in, you touched on semiconductors in the prior segment-- a lot of people who are willing to bet, and that's the key word here, bet on the short-term price movements of the semiconductor industry, both long and short this year.

SEANA SMITH: Todd, talk a little bit more about the risk. Because I think when some day traders or traders, when they see some in terms of outperformance, they get all excited, then they put too much money into these leverage or inverse ETFs. Talk to us a little bit more about the risk associated with this, because these are very super sized bets that people are making.

TODD ROSENBLUTH: That's right. So unlike traditional ETFs, either they're index-based or actively managed ETFs, these are really intended for the very short time horizon. The longer that you are there, the greater the risk that's there. Basically, if you're at a casino, and you're putting money at the table, and you're leaving it on for the next hand.

Now, I'm not equating using leverage and inverse ETFs intentionally as gambling, but you have to think about it the longer that you stay there, the more risks that are involved. These are best used from an extremely tactical perspective-- a day, or two, or three. Better if you actually have long exposure to the other side of the trade and you're hedging that.

But if you think about this relative to actively managed ETFs, which have been gaining traction in 2022, we're seeing the investors getting the benefit of that stock-picking and skill selection from the management team-- a management fund like the JP Morgan equity premium income ETF, JEPI.

It owns equities and it uses options to be able to enhance the income perspective. So you get a much different experience than you would if you were using options alone in a leverage or inverse perspective. So JEPI has held up better than the broader marketplace because of that income component. And it's one of the trends that we've identified at VettaFi in 2022.

RACHELLE AKUFFO: So, Todd, how should people think about whether they should choose active versus passively investing in ETFs? And if you could also, I wanted to get your comment on Cathie Wood's 21 shares trying to list once again for this spot Bitcoin ETF, and the SEC having none of it, delaying, again, that decision till January. I want to get your feelings also on some of the potential, perhaps, for these Bitcoin spot ETFs.

TODD ROSENBLUTH: Sure. So let's touch on the active management component. This has been, actually, a very good year for active management within both the equity and fixed income space. We've seen fixed income-- active fixed income ETFs, some of them outperform the broader ag-- the iShares Aggregate Bond ETF, AGG. We at VettaFi put out a piece that looked at some of those core bond products like Fidelity total bond ETF, FBND, we saw strong interest in that. We've seen TOTL, which is a SPDR ETF that has outperformed the AGG this year.

It's held up better. It's still lost money. So you can make money through an actively managed fixed income ETF, get the benefits of the security selection without having to take on this same level of risk. And we're showing TOTL, which is from State Street. This is a product that's subsidized by DoubleLine, experienced management team, really held up better than the broader marketplace by using security selection and interest rate management to be able to deliver those returns.

You touched on real quick about the ARC product. ARC is, again, the latest firm to be awaiting approval for a spot Bitcoin ETF. The SEC continues to have concerns about risks related to Bitcoin from a fraud perspective-- not specific to ARC. This has been happening across the broader industry.

So it's certainly going to be until 2023, and perhaps even later, before we get a spot Bitcoin ETF. But investors can get exposure to Bitcoin futures-based ETFs with an ETF like BITO, which is from ProShares, which is, again, it's performed quite poorly because the Bitcoin marketplace is down. But investors have stayed relatively loyal to BITO.