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The name of the game in the next quarter is volatility: ETF expert

Yahoo Finance's Kristin Myers and Cinthia Murphy, Managing Editor of ETF.com, discuss which ETFs may be best heading into the last quarter of 2020.

Video Transcript

KRISTIN MYERS: We're joined now by Cinthia Murphy, managing editor of etf.com. Cinthia, good to chat with you again. So September, last day today, been a very weak month. And you noted in your note, the worst in over five years, of course, after a tech-led sell-off. Wondering from you how investors should start approaching the fourth quarter, and if they should start looking more at cyclicals.

CINTHIA MURPHY: Hey, Kristin, thanks for having me. Yeah, September has been a really terrible month. Is it usually the worst month in the year for stocks? It actually is. So from a seasonality perspective, not too surprising, the action. But when I was looking at trying to figure out what is going to happen Q4, I went and read outlooks from folks like BlackRock or a lot of the big brokerage firms, and the name of the game and the next quarter starting tomorrow, is volatility. There's going to be a lot of volatility, especially linked to the election.

And you see that already, investors reacting to this anticipation already going into next month. So when you look at Q4, for reference in 2016, the last time we had a presidential election, I looked at the ETFs, they really gathered assets then, and it was a complete risk on trade. You saw demand for all the S&P 500 funds. You saw demand for small caps. You saw money flow out of your diversifiers, like gold and bonds. It was really risk on. This time around, it's all over the place.

Investors are continuing to buy some equity funds. NASDAQ 100 QQQ has picked up more than $5 billion, even though it's been correcting. So the demand for equities remains strong. But you've also seen huge demand for gold, for bonds, for the diversifiers. And it just tells you that the pandemic really is adding a twist to your classic election, to your seasonality trade. It's a year of unknowns more so than ever before. And you see that across the risk spectrum of ETFs, people going all over the place trying to make sure they're broadly diversified to weather whatever storm may come.

KRISTIN MYERS: I'm wondering if you see a lot of buying opportunities going forward, especially as we see some of these sell-offs happening.

CINTHIA MURPHY: One of the things we've been watching is, there has been this really big, I wouldn't say push, but investors are trying to be really positive about the cyclicals. Your value, your small caps. And these ETFs have picked up assets, like VLUE, like IWM but they haven't necessarily, you don't see a conviction yet on that trade. The value's going to be growth from now on, because tech is done. There's not a lot of conviction in this trade. But there's people looking for signs that this now is it time to buy cyclicals.

You see actually a lot of money going into ultra short-term bond funds, like the JP Morgan JPST. That fund is like the biggest asset gatherer among active ETFs this year. And it's a fund that 15% of it is allocated to the dollar basically. It's a cash, it's a money market-like fund. It uses a cash management tool. It tells you people are keeping money on the sidelines, easy to access, but easy to run to. It's a total safety trade.

So that continues to be a strong trade in terms of people staying a little bit on the sidelines, not full in, because who knows whether the economy is going to reopen, is a vaccine going to come or not going to come. Is the election going to throw a wrench on the slow economic growth we've had? Is it going to really derail things? It really is a year of uncertainties.

KRISTIN MYERS: So speaking about uncertainty and safety, you mentioned gold. I want to ask you about that, because you and I have chatted about gold. And what a difference in gold from just a couple of months ago when you and I were talking about it. Right now holding at $1,896.70. Where do you see gold going through to the end of the year? Before, we had been talking about levels of $3,000 and even potentially $4,000. So obviously, a big drop there.

CINTHIA MURPHY: Well, last time we talked, I cited VanEck Outlook, which was gold 3,000. And the next day, gold started dropping. So I would take everything I say with a grain of salt clearly. But it's been a trade that fizzled out a lot. But it doesn't mean demand fizzled out. GLD has picked up $5.5 billion in the last quarter. It continues to be a big safety trade, even as gold shows weakness. So as a diversifier, it has now lost its luster. But as a return performance, it's not doing so well.

KRISTIN MYERS: All right, well, we will have to leave that there. Always great chatting with you. Cinthia Murphy, managing editor of etf.com

CINTHIA MURPHY: Thanks for having me.