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Inflation: ‘More money has gone into commodity ETFs this year,’ ETF Trends CEO says

ETF Trends CEO Tom Lydon joins Yahoo Finance Live to discuss the Fed rate hike and how inflation has impacted the ETF space.

Video Transcript

SEANA SMITH: Stocks rallying with 20 minutes to go until the closing bell on the heels of that decision that we just got from the Fed. The Fed raising interest rates by 50 basis points. Fed Chair Jay Powell saying that there are no plans, at least for now, to raise rates by 75 basis points. So let's talk about what all this means for ETFs. And for that, we have Tom Lydon. He's the CEO of ETF Trends. This is part of our ETF report brought to you by Invesco QQQ.

Tom, first, let's get your reaction to this because looking at the markets more broadly speaking, it looks like investors were encouraged by what they heard from Fed Chair Jay Powell just a few minutes ago, also from the statement that we got from the FOMC. But what did you think of it?

TOM LYDON: Yeah, it was very optimistic. There was some whispering, as you know, going on about maybe sneaking in 75 BIPs, and it was nice that it wasn't done. However, we know and we're surveying advisors all the time. The Fed's got a big task on there at hand. For the last couple of years, surveying advisors, their number one concern has been inflation. The Fed has signaled that they're not as concerned about inflation. It's transitory. But here, we have real hefty inflationary numbers coming out.

And also considering the way inflation is measured today compared to how it was measured back in the '70s, which tends to be the benchmark for most advisors, it's definitely concerning. So more and more, we've seen money in motion that we haven't seen in the ETF space for a long period of time. More money has gone into commodity ETFs this year than we saw go into fixed income ETFs, which is really surprising.

And more and more advisors tend to shift away from not only fixed income, but the benchmarks like the S&P 500, which really was a stalwart for the last 10 years coming out of the financial crisis, people are concerned because of the heavy allocation in the FAANG stocks and Tesla and Microsoft that have all been underperforming the major market indexes so far.

SEANA SMITH: And Tom, what are you hearing just from investors? Because talking to us about what funds are attracting inflows right now, are there some investors that you think are simply staying on the sidelines because of some of the uncertainty out there?

TOM LYDON: Yeah, we have over $6 trillion in money market funds, which is a record. And also a lot of money has gone into short duration. But the AG, the broad market index in the fixed income side is down 10% year to date after a poor year last year. So you think about investors that are approaching retirement or in retirement right now. That's somewhat dead money, and in fact, a dangerous area if we have an extended period of time of rising rates, which is really, really scary.

But we are, for the first time, seeing sizable moves going into commodities for all the right reasons. But many are saying that we're just in the early innings as inflation, although, signaled 8% or so on the CPI, we could be in an extended period where it could be 3% to 5%. And historically, for commodities, that's a really good period. So, having, in the past, a 5% allocation, many advisors are moving that up to a 10% or even 15% allocation for their clients.

SEANA SMITH: Tom, something you and I have talked about in the past, there are these thematic strategies. And you talk about the popularity of maybe commodity funds right now. When focusing on thematic strategies, though, does that make sense in this type of market?

TOM LYDON: Well, it depends on the areas that you're moving to. There's some themes like traditional growth or even innovative disruptive technologies like the Cathie Wood's and the Ark's of the world, definitely been punished. However, if you look at the valuations and those thematic strategies now, they're pretty inexpensive. And if you've got a long-term outlook, being able to buy Cathie Wood ETFs for 50% or 60% off, and if you've got a 10-year horizon, pretty big opportunity there for sure. And we're seeing some money go into those areas.

We're also seeing money go into options overlay strategies, where you may have an underlying index like the S&P 500 or the NASDAQ 100, where you can have options that can kick off 5% to 7% income in a time when income's challenged on traditional fixed income strategies, where money moved from an income side of the balance sheet over to the equity side of the balance sheet where you're still invested, but also get that income kicker, that's been really attractive.

SEANA SMITH: Tom, a mover here this afternoon is Bitcoin. It was briefly above 40,000, now sitting just below that level. Some talk out there about when or how likely it is that we will see a Bitcoin spot ETF. What are some of the trends that you're hearing from investors, just about how they want to or how they plan to invest in crypto when it comes to ETFs?

TOM LYDON: We do a survey with Bitwise every year, and we just finished the fourth year. More and more not just individual investors, but advisors that work with high net worth clients are trying to find ways, and safe ways, to get allocation. If you custody at a Schwab or a Fidelity or a Morgan Stanley, it's really difficult to be able to allocate into the currencies themselves.

However, there are some future strategies in the ETF space that are available. There's some separate account strategies that are available as well. I think eventually, we're going to have to see that the SEC chair has to turn the card. He has to be able to allow investors to go into this area. It's just baby steps that they're taking. And with this future strategy that they have available now and approved through 40 Act ETFs, it's the closest he's gotten to be able to allow advisors and individual investors buy that in their brokerage accounts.

SEANA SMITH: And Tom, just wrapping up and going back to the theme of the day, which was the Fed and what we just heard from Fed Chair Jay Powell, any concern from you and some of the trends that you are closely watching that we could potentially be at risk of a recession if the Fed does, in fact, act a little bit more aggressively than what investors are hoping to see?

TOM LYDON: That's the big question, Seana. It's a big concern because we have to find inflation, but many advisors are feeling like the Fed's, A, too late and, B, not being as aggressive. And if that puts us into recession, so be it. Many advisors are more fearful of the aftereffects of inflation and what that could do, even though we might go into a recession for a short-term period of time Fed's in a tough situation, and investors and advisors are very much concerned.

Even though we, in the US, are in better shape as far as food, gasoline, services, those types of things, we have to keep an eye on what's going on overseas because it's not going to be that long before some countries actually have food shortages or energy shortages. And that's going to spill over onto our shores. You were talking about the right thing. And today, yes, it's nice and positive to see the moves in the market. But this is going to be a long-term battle. It's going to be a marathon.

SEANA SMITH: All right, Tom Lydon, always great to speak with you of ETF Trends, CEO there.