ETFs: Investors tilting portfolios back to equities, expert explains

U.S.-listed ETFs saw over $200 billion of inflows in the first half of 2023. Ben Slavin, BNY Mellon Global Head of ETFs, Asset Servicing, joins Yahoo Finance Live's Brad Smith to discuss investors' reinvigorated sentiments on ETFs, fixed-income categories, and AI-themed ETFs.

Video Transcript

BRAD SMITH: The first half of the year though, closed out on a strong note for ETFs. Overall inflows for US-listed ETFs, which includes funds tied to stocks, bonds, and commodities, reached $200.6 billion at the end of June. That's compared to the $298.7 billion seen from the year prior.

As part of this week's ETF report brought to you by Invesco QQQ. Let's bring in Ben Slavin, who is the BNY Mellon Global Head of ETFs Asset Servicing. Great to have you here with us this morning, Ben. So what are the most promising ETFs that you see for the second half of the year?

BEN SLAVIN: Well, first of all, that stat is incredible to see given where we were at earlier this year, considering investor's preference for cash. So off the market low in October. Since the S&P has rallied, we saw around $900 billion flow into money market funds.

And as that statistic shows, it's quickly reversed. We saw 73 billion come into the ETF industry in just the last couple of weeks. And so you can see how quickly we're making up ground. And investors are starting to tilt their portfolio back towards equities, but certainly, the flows would dictate that it's been pretty selective in terms of where investors are looking to put that cash.

BRAD SMITH: Where are some of the more pronounced themes that you've seen investors really start to gravitate towards?

BEN SLAVIN: Well, again, it's been kind of a mixed picture. But let's sort of break it down in a few different areas. Certainly, fixed income has been one area where investors have been looking. Not a shocker to see that fixed income had led equities in terms of ETF flow this year.

But again, given what's happened in the last couple of weeks, it's reversing. But there are selective opportunities. Such as emerging market bonds is an interesting place to look at and started to see some investor appetite come back into that market. Given the performance, we've seen that lead the pack in terms of fixed income, in terms of performance this year.

So there are several different ETFs that track those markets. Also, areas like convertible bonds as well has also been a top performer this year. Again, it's been roughly dormant for quite some time and now we're starting to see signs of life.

Other areas, certainly in small caps. Again, more of a recent phenomenon, where we've started to see that category come back to life. And products like iShares IWM, which tracks the Russell 2000 has started to see investor interest. And also, that's looking-- as it's been starting to outperform, really, the last few weeks. But certainly, been a laggard since we've seen this market rally off the bottom.

BRAD SMITH: Several years back, all the talk was about how millennials were really embracing ETFs. Has the kind of makeup of investors that have tried to or at least put more towards-- more attention towards ETFs, has that shifted at all? And if so, where?

BEN SLAVIN: Without a doubt, there is no question that there is a shift going on. And certainly, the data will bear that out. We have seen money come continually out of mutual funds.

Last year was an extreme outlier. But it's certainly a trend that we've seen, which was a $1.5 trillion swing out of mutual funds into ETFs. And there are several reasons for this. I mean, certainly, the liquidity, the fact, they're low cost, the tax efficiency is all driving that.

But if you look at market surveys, you talk to advisors, and even talk to many of our clients at BNY Mellon, there is a different shift in how these products are marketed. And the appetite towards the younger generation as we're seeing this wealth transfer begin to take place has really benefited the ETFs. And there doesn't seem to be anything at the moment that would indicate that trend is going to slow anytime soon.

BRAD SMITH: We had seen some type of interest towards ETFs that were even tracking SPACs. The SPAC bubble has clearly burst here. I think it's fair to say. Or at least, it's deteriorated substantially.

Has there been-- of course, where there are inflows into some ETFs, outflows, I guess, on the other side, perhaps worth part of this conversation as well. And if not SPACs, anywhere else where you're seeing significant outflows.

BEN SLAVIN: Yeah, actually, there was a SPAC and a DE-SPAC ETF. So you know, typically, with ETFs you get both sides of that trade. But what I would say is these thematic ETFs, you know, quote-unquote, "Which are quite popular in the ETF market." And we've seen several indications that, again, this trend will continue.

More recently we've seen, for example, AI. And AI-themed ETFs obviously catch investor attention. Now the hype cycle has been off the charts for AI. But ETFs again, offer a quick low-cost, easy way to access this theme by investors. And it's another great example of ETFs providing that tool kit to provide this type of access.

So maybe 18 months ago, it was SPACs. Now it's AI. And certainly, there's a wide variety of options out there for investors to tap into as these themes continue to develop.

BRAD SMITH: Yeah, one of the subsets-- even within AI as I've been tracking it over years is the ETFs, like, cyber or hack that are more cybersecurity focused but have AI elements that are also infused into many of those businesses too. Are there different areas even as subsets of AI, where you've seen people or investors kind of pick and choose where they kind of want to lean more into the language learning models or lean into the chips part of AI or lean into the applications part?

And if so, where's that-- certainly, I mean, I imagine that it's been in chips. But, where have you seen that from your side kind of catch even more fire at this point?

BEN SLAVIN: Yeah, this is a question near and dear to my heart. And I think it's a great example of investors and advisors really knowing how to do their homework in the ETF market. There are lots of products that are out there and also some variants of these themes. Like you mentioned, hack and cyber.

Certainly, AI-themed ETFs. There's also robotics and other automation-themed and technology-themed ETFs. So it's very important for investors to look under the hood and know what you own. And one of the great attributes of ETFs is that information is all available. And it's available on a real-time basis.

So whether you have a place to get your financial market data that-- or just looking at the investor's websites, that is a way to access what is in these funds and be able to suss out how you want to position those portfolios and understand the weightings and really what's contained. It's more than just the name.

BRAD SMITH: Ben, thanks so much for joining us this morning. And helping break this down, especially, as we are now in Q-- well, not Q2-- Q3, and the second half of this year. Looking forward to what more ETFs will bring in terms of some of those inflows. BNY Mellon, Global Head of ETFs and Asset Servicing joining us here this morning. Thanks so much, Ben.