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What U.S. tensions with China mean for ETF investors

Yahoo Finance’s Alexis Christoforous and Kristin Myers discuss ETFs impacted by U.S.-China relations with Tom Lydon, ETF Trends CEO.

Video Transcript

ALEXIS CHRISTOFOROUS: Tom, I know that it's been off to the races here in 2021 for the ETF market. You're seeing record inflows, but give us an idea of where that money is flowing exactly. And has it changed over the past couple of quarters?

TOM LYDON: Yeah, you're absolutely right, Alexis. So we just are finishing the first quarter with close to $240 billion in new assets. That's putting us on pace for almost a trillion dollars this year, which is record breaking, considering we hit a high last year of $600 billion.

Most of the money is going into growth, but surprisingly, investors are finding an opportunity overseas, not just in developed countries, but especially in emerging markets. Those have worked really well when we've seen a lower dollar the last 18 months. However, most recently, we've seen the dollar creep up a little bit. And more money has started to come back domestically, especially back in the large cap growth.

KRISTIN MYERS: Now, Tom, I know that you've been looking at the decline in Chinese tech stocks. They've been declining for the last couple of weeks. Do you view this as a buying opportunity?

TOM LYDON: Yeah, it was kind of the perfect storm for tech stocks, you know, considering the fallout of Archegos last week. There was political pressure that Biden was putting on in his news conference last week with the idea that, especially with Gary Gensler coming on board as the new SEC chair, that those Chinese companies that are not adhering to proper accounting rules and regulations might get bounced from exchanges. This is something that came up a few months ago. But with Biden, I think we're going to see a little bit more scrutiny.

However, last week, especially with Chinese tech stocks it seemed like the baby was getting thrown out with the bathwater. Some of these companies are down 35% or 40%. And when you look at the growth opportunities, especially in the fact that there are a lot of Chinese citizens that still don't even have computers or cell phones, and the amount of growth in these-- let's call them Chinese FAANG stocks-- are just going through the roof.

So if you're not diversified overseas, especially if you're not diversified in China, which is continuing to grow at a fast rate, it is definitely a buying opportunity. And a couple areas to look at are the KraneShares, Chinese technology ETF. KWEB is one area that you might want to consider. Another is the Harvest 300 China A shares, which is ASHR. These are A shares, which are mainland China companies, where we normally, or up until just a couple of years ago, wouldn't have access to if you lived outside of China.

These stocks are finding their way into major market indices through MSCI, but at a very slow rate. So if you want to get out in front of the line, this is another opportunity for you.

ALEXIS CHRISTOFOROUS: Speaking of getting out in front, is it too late for people to jump into some of these infrastructure plays when it comes to the ETFs. And now we're getting that infrastructure plan from President Biden in about an hour and a half from now. What are some of the big players there? And do you think that perhaps it's a little too late to jump in at this point?

TOM LYDON: Yeah, NFRA and also PAVE, P-A-V-E, are two ETFs to take a look at. It's not too late. They have kind of underperformed the general markets, but in the last six to eight months have seen a lot of love. And they've seen a lot of assets. It's going to be very interesting to see what the Biden message is, to see how much money is put towards these companies.

And remember, these are not just domestic plays. These are international companies as well. So it's a way to diversify your equity portfolio and also diversify your currency risk. So take a look at those. I think with the support that we're going to see with the infrastructure bill, these might have a long way to run for sure.

KRISTIN MYERS: Tom, how should investors be approaching the tech sector right now? I know you at least, when you were mentioning the Chinese FAANG stocks, a lot of room there, a long runway for them. But how should investors really be approaching those FAANG stocks over here in the United States? We were having a conversation a little bit earlier, again, highlighting the concerns around valuation.

TOM LYDON: Yeah, for sure. So, great question. First of all, we've had a high amount of allocation when you look at the S&P 500 and how those FAANGs have a disproportionate weight. What we've seen is a lot of folks have looked to active managers. And you talk about Cathie Wood and the folks over at ARK who've done a great job from a thematic standpoint. Also, the QQQs is another way to diversify. If you're looking for future FAANG stocks, a great ETF to consider are the QQQJs, which are kind of the baby Qs that were just launched about six months ago.

Also, Moon by Direction, M-O-O-N, is another way to take advantage of innovative companies. So thematic ETFs, especially in the tech space, have gotten a lot of attention for all the right reasons. Because a lot of these companies, you're not going to see in your S&P 500 allocation, which many individual investors have very high correlation to. It's a way to further diversify. It's a way to, let's say, future proof your portfolio, and not just have these big mega cap stocks.

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