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Only 6% of ETFs in first 3 quarters of 2022 had positive returns: Analyst

Aniket Ullal, CFRA Research Head on ETF Data & Analytics, joins Yahoo Finance Live to discuss ETF performance amid a challenging macroeconomic backdrop and where investors are flocking.

Video Transcript

[AUDIO LOGO]

RACHELLE AKUFFO: Many investors ready to say goodbye to 2022 with the S&P 500 down 16% so far this year. But a glimmer of hope, the fourth quarter giving investors a bit of a gift with some major ETFs clawing back some losses. Well, joining us now is Aniket Ullal, CFRA Research head at ETF Data Analytics. And this week's ETF report brought to you by Invesco QQQ.

So good to have you on the show. This is a very interesting time as markets are still trying to decide what's happening with the Fed and what the expectations are. What does that do in terms of the inflows into ETFs? What are the more popular ones right now?

ANIKET ULLAL: Well, as you said, it's been a very interesting time in the ETF market. The first three quarters of the year were extremely challenging. We actually tallied all the ETFs listed in the US in the first three quarters and only 6% of them actually had positive returns, which means 94% of all ETFs across equities and bonds were down in the first three quarters of this year.

In the fourth quarter, as you mentioned, we've actually seen investors coming back into slightly riskier asset classes. This includes ETFs like EEM, which is emerging markets. That's up 8% this year after being down 28% in the first three quarters. We've seen small cap stocks, be up about 12% after being down 25% in the first three quarters. And so we're seeing investors kind of coming back into those asset classes that they only tend to get into when they're feeling a little bit more confident taking risks, or what we would typically count risk on asset class.

So those are the asset classes. We've seen performing better in the fourth quarter, which is a sharp contrast to what we saw in the first three quarters of this year.

RACHELLE AKUFFO: So then are you already seeing a lot of movement out of some of these defensive stances then, or are people still sort of evenly holding those right now?

ANIKET ULLAL: We've started to see some movement. If we look over the past three quarters, it's important to remember that flows-- in other words, new money-- tend to follow performance. Flows tend to lag performance. So since ETFs didn't perform well in the first three quarters, investors are flowing or moving money into more defensive sectors.

So we were seeing money moving to dividends. We were seeing money movement to low volatility stocks. We were seeing a lot of money move into treasury bond ETFs. These are sectors where investors move in when they're trying to be more defensive, have a cushion in their investing. We've seen that moderate, as you mentioned, a little bit in the last month. So for example, if you look over the last three months, treasury bond ETFs made up 24% of all new flows into ETFs. That is down to about 5% in the last month.

So now, the world is slowly seeing investors take a few more risks and slowly moderate their positions from being very defensive to being a little more offensive. In other words, taking on more risky asset classes.

DAVE BRIGGS: What do you expect the impact to be from the upcoming Fed meeting in December?

ANIKET ULLAL: That's going to be a very, very critical moment. As you know, this is a very expectations-driven market. We think that the reason investors have gone into some of the more risk on sectors is because they saw inflation coming in lower than expected. That resulted in investors expecting much lower, you know, 50 basis point increase in the Fed funds rate as opposed to the 75 basis points we've been seeing historically.

And so it's really these expectations and the change in inflation that's really driven flows and this performance. But it's too early to call the bottom. We're not so sure yet that this is the bottom. We have a whole bunch of analysts who look at the technical side of it, fundamentals. And we're not yet convinced that this is the bottom. We'll have to see what the Fed does in December and then how the market reacts to that.

So there are early signs of investors coming back into the market taking on more risk. But it's still early days before we call this the market bottom.

DAVE BRIGGS: Yeah. It does feel awfully early to call a bottom, doesn't it? Aniket Ullal, we appreciate you being here. Happy Thanksgiving. Enjoy the weekend, sir.