ETF Edge - Living up to Expectations? 7/20/26

Episode Date: July 20, 2026

We’re ahead to head in the maelstrom of earnings season. Expectations are high. Could volatility spike higher?   Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQ. Let's rethink possibility. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange, traded funds, you are in the right place. Every week we bring you compelling interviews, thoughtful market analysis, and we break down what it means for investors.

I'm Contessa Brewer, in for Domchew today. Are markets setting themselves up for disappointment this earning season? and should ETF investors prepare for volatility? Here's my conversation with John Mayer, Chief ETF strategist at JPMorgan, and Cynthia Murphy, Director of Research at VETI. Nice to see both of you today. Look, I want to get your perspective

on what we've seen so far from earnings, and can we apply it, John, do you think, for the rest of earnings season to come? You know, it's been a great earning season, as everybody knows. The banks have reported, about 50 companies have reported, Now, solid, there's been solid reward for beats so far one day after earnings announcements. That's a positive.

We also know that there's a tremendous amount of money that's being spent by the hyperscalers that's filtering through to many different sectors, whether it be industrials and materials and energy sectors. So we are expecting that this season is going to be pretty robust. We've seen sort of a broadening in, terms of who's gaining in the market. And Cynthia, when you're looking at how earnings have come through so far, FACSET says 88% of S&P companies that have reported

have reported earnings that beat expectations, sometimes by double digits here. So what's your expectation moving forward through the rest of earnings season? You know, to John's point, I think this broadening, this trickling effect is really important. We're all watching for that this time around. If you think about what has really driven the equity markets, look at the tech stocks,

the Meg 7, the mega cap technology, the expectations for combined earnings for these firms is around 28, 29%, which is massive compared to the SMP 500 overall, but it's much smaller than it was less quarter. So there is a sense that that gap between the top seven and the 493, if you will, is narrowing, so the broadening is in effect. So we're all going to be watching for the signs of this trickling into other sectors, into other parts of the market, of the earnings benefit from all this cap-back spending and AI we've been chasing. You know, that's great, Cynthia.

Also, the banks are like telling us a few things. So they are indicating that the consumer is strong. capital markets have been crazy, super strong. So that leads me to believe that there's going to be a broadening out in the marketplace for these earnings reports that are coming up. So when the banks give you an indication that American consumers are still spending, look, I cover the travel sector. And what I've heard from travel companies is that even if people are holding onto their cash in other areas,

Maybe they're trading down at the grocery store, that they still want to travel. It is a pervasive signal of strength in these American consumers. How do you play that when you're choosing your ETFs? What sector, Cynthia, do you look for to say, oh, the American consumer is doing surprisingly well? You know, that's a great question. And what's really interesting about that is that we see a little bit of this dichotomy between consumer sentiment, data, showing really, really low readings. And then we see consumer spending too really strong.

So, you know, a fund like I buy, for example, you know, online retail and then on spending an interesting play. We also see a lot of these kind of luxury and consumer-focused names like a Walt Disney company, for example, in a fund like V-Flow, which is looking at high-quality companies that are benefiting in this market, you know, generating really high-free. cash flow, really high growth prospects. There's a lot of these types of names in this portfolio, which is performing really well.

So it's not a direct luxury spending play, but you see a lot of these names in these kind of high quality portfolios as well. Are you, Cynthia, seeing any areas of weakness that could foretell disappointing results in some of the Keystone companies that we watch? Yeah, I think, you know, I think what, I echo John's sentiment here,

the broadening is about, big story. So I think it's been interesting for me to watch. I'm really amazed at the persistence of the semiconductor and memory play. So as much as we like to say, this is really overrun and it needs a correction. And, you know, we've seen headlines about chips being in a bear market. Now, I mean, we cease to a ton of money flowing into this part of, you know, the hardware infrastructure of the AI story. That's still running. Is it going to run forever? No. But the concept of the bottleneck remains a big, strong driver. of asset flows and performance. So that's been really interesting to watch. There's just so much

appetite as well. I mean, if you look at the DRAM here, here's a brand new ETF that comes out focused on memory and it goes from zero to $60 billion in flows already. I mean, what do you make of the just incredible hunger there is for this space? Yeah, it's a little bit less than that, but it's an area that is very exciting. So the technology, area probably received about $60 billion in flows this year. Last year. And all of technology, not just the DRAM. And $40 billion last year.

So it's increased a lot. You know, what I find, and from my experience, working with financial advisors and clients, is that people like these exciting things, like, wow, I want to have these 100% returns. There's a FOMO that exists. Now, with that comes a lot of risk. That's what, from my perspective, has a lot of. having an active manager, which is JPMorgan, we are active managers. We do bottoms up research.

We may focus on some of these memory companies. We may focus on some old line companies, depending on the kind of the strategy, by having these managers looking at really where the earnings are coming from. Right. And the valuation to higher or low, that's where you can benefit as an investor buying an ETF like JTEC, JT, it's one of our technology ETFs, by now. not just being exposed to a very narrow segment. It's enticing though.

But Cynthia, do you agree? Like, is there a hedge against volatility that happens? If you remain in ETFs that have broader exposure than these slices within the greater sector? I think you can have both ways. So if we look at the broad market performance and our expectations for earnings and everything, we're talking about the broadening,

we're talking about beware of, of high concentration. The market is very concentrated. And anytime you're really heavily, you have 40% of your portfolio in 10 stocks, you're gonna be really exposed to volatility, which is what we've seen all year long. So the story of broadening is a story of good investing, long term,

especially if you don't wanna have a lot of heartburn. The bottleneck story is a little bit different. Like if you really focused on, say, the AI memory opportunity of a fund, like DRAM. That's a kind of a growth component. It shouldn't be your core portfolio. It can be like a thematic play that you would add on top of your broader technology segment. So you can do both things. But anytime we choose concentration, you are choosing potentially higher risk and higher heartburn any given day. So you've got to be aware of those choices.

You know, Cynthia, most clients' money kind of sits in that moderate, moderately aggressive area. Now, also, most clients don't necessarily have a stomach for volatility. And volatility right now is relatively low. It's about 8. The VIX is 18 or 19 or so. But if you actually drill down and look at the individual companies, some of those companies, and particularly the MAG 7 or the top 10 in the S&P 500, volatility is relatively high, but volatility could be lower from some of the other companies. So that kind of sort of cancels it out and brings volatility lower.

Now, if investors are looking to lower their volatility, they can look to things like derivative income. We have a fund, JEPI, which is the second largest actively managed ETF. It has a volatility of about 60, 65% of the S&P 500. It's not designed to return what the S&P 500 returns because it has lower volatility. Well, what's the return on it? The return is, first of all, you get an income of around 7 to 9%. right now is about 8%. And because it's lower volatility stocks in the underlying,

brings down volatility. Because the option overlay brings down volatility, you can get that 60, 65%, and you are getting that approximately 8% distribution on the fund. Can we talk a little bit about industrials here and the way those have been lifted by the AI data center ambitions of a lot of these companies? and how we're seeing ETF funds react, Cynthia?

Yeah, I mean, with Syntimate industry, really is part of the infrastructure play. You know, AI is a tech play, but nothing happens without the build out of the infrastructure, as we know, whether it's data centers, we see that energy grid, there's a whole backbone infrastructure that needs to be built,

and that has really pushed up industries. If you look at XLI, from State Street, the sector, Spider, the valuations are really high relative to the SMP 500. It's as high as tech. So it really is a sector that has really had its moment in the sun and picked up a lot of attention, a lot of flows because nothing is going to happen without a lot of focus on infrastructure and the buildout that comes with it. What's interesting is that not only the AI driving performance here,

but also just geopolitics and the concept of defense. So that has also supported industrial. So it's been a really good year for industrial stocks. And there's a lot of tailwinds there. Yeah, good point, Cynthia. The flows really have been strong, $17 billion. On the active side, 34% of all the flows into industrials have been actively managed. The CAPEX spending is really kind of feeding into that industrial component.

security, we talked earlier about cybersecurity, security and resilience is really important. Sure. And that's going to play even bigger and bigger of a role. And that's one reason why insurers, in fact, are looking at the data center build and everything from the very first shovel that hits the ground on through operation, and there are opportunities now for coverage. But probably, in fact, a global reinsurer CEO just told me today, there's probably not enough capital in the space right now to handle some of these projects.

that provides opportunity moving forward in the future. Absolutely. And I think the market is always forward looking. And that's really what a stock price is, a cash flow of future earning. So that's all the point. That we just heard from the Fed Chair last week. Talk to me a little bit about what we're seeing with bonds and in fixed income.

Well, first of all, the fixed income, the bond market overall is an active market for the most part. ETS generally have grown up passive. But if you think about like how, how the baskets are constructed. You're trying to, even if it's passive, you're trying to find a basket that's similar to the passive index.

It's not exact. Now, active managers and the active ETF market has largely always been active, typically outperforms because the ag only has half the market. There's this portion, the securitized market, which is not in the ag or just a little bit, which you can find real alpha, duration and,

yield in that market. So the active market is really important. Now with respect to the Fed, inflation is a little bit higher. That could be a one-off or it could be declining a bit. We are seeing indications that it's declining as energy is declining. Tariff noise, the tariffs are coming down. So those things could bring down inflation. The Fed is only one of the chairman of the Fed is only one vote out of 12 votes. So he would have to do some persuasion for the other 12 voting members to increase rates, to decrease rates. He's not going to decrease rates. Could he increase one or two? Possibly. What do you think, Cynthia? One, are you seeing more investors turn toward active ATFs for bond adjustments? And two, what are you expecting from the Fed?

So the Fed last week when the testimony to Congress, I remember Warsh saying, you know, we are going to deliver price stability. The expectation is for rates to come up. maybe neutral this year and higher next year. In that sense, what we've seen ETF investors do, we're seeing almost record amount of money going into bond ETFs, over 35% of all flows year-to-date have gone into bond ETFs. But we're seeing that money being allocated either in the very short end of your cash-like defensive positioning or on the other end,

but it's mostly to John's point, securitized debt, some credit, avoiding that treasury duration, because rates are expected to potentially go higher. So we're seeing a kind of a barbell approach that is looking for the short end and then securitize that and alternative fixed income sources on the other end. And it's been really interesting because it's defense, it's income generation, things to John's point, Jaffe and funds that are generating that equity income, that is not fixed income related at all,

but trying to manage expectation for higher rates coming up. Yeah. And if you look at the Treasury rates, they've been kind of hovering at 4.5, 4.6%. So that gives you a sense of inflation expectations. And I manage the guide to ETF program at JPMorgan. We have a really cool slides that looks at flows with different duration metrics. And you'll see on the long end of the curve, very, very little money going into the long end of the curve. It's so interesting.

I want to mention you just released your quarterly guide to ETFs. And what we're seeing is, I mean, one of the charts that really caught my eye was this timeline of thematic assets under management when we're looking at ETFs. What we're seeing is, say from 2018 to today, just a skyrocket, a rocket ship going up of AI investment. You might imagine that, but look back to our point about infrastructure that has been high

and has stayed high almost in line and in conjunction with AI. And then defense, cybersecurity, natural resources lagging more, Does this surprise you or do you think it's to be expected? Well, first of all, you know, I've been involved in thematics while that JPMorgan is my previous firm GlobalX. Back in around 2021, there was just a huge push into thematics like electrification, like electric vehicles and robotics and things like that. Many things are kind of morphing towards AI and ecosystem surrounding AI.

So infrastructure, which has been doing very well for several years, kind of feeds into that story as well as. energy and materials, things like that. So it doesn't surprise me at all. It's all kind of feeding into the AI story. We talked about the layer cake before, the applications, the energy, the AI models. And the icing on the cake. The icing on the cake.

The other thing that this report points out pretty dramatically, and it's new to me, is how precipitously the flows into mutual funds have tapered off. I mean, it's dramatic. What is it about ETFs that is so much more appealing to investors than the mutual funds that we grew up with? Yeah, you know, I think mutual funds will be around for quite some time, but we have a great chart in the guide to ETFs that shows negative flows into mutual funds consistently since like 2020. And that's only going to continue.

Now, the ETF provides five basic advantages, which I won't go into all, but liquidity and the key, particularly for equity funds is tax efficiency. They typically don't pay a capital gain. And if they pay a capital gain, it's kind of like on a narrow portion of the market, which are like levered and inverse ETFs. Some fall into the active space, but it's kind of like just a different thing.

So a mutual fund is just a thing of the past, they're dinosaurs? They're not a thing of the past, but imagine if you bought a mutual fund in 2022 and you're down 20, 30, 40 percent, depending on what part of the market you bought, and you still got a capital gain of six, percent, you're not happy.

When we're looking ahead, I mean, look, we've had geopolitical instability, energy prices going up. There's been a lot of worries about the American consumer. All of this seems to be easing somewhat. Cynthia, what do you expect for the next six months? I think this earnings report season is going to tell us a lot, and we're all going to be looking at the forward guidance to figure out where to go next. That said, if expectations for higher rates stays as they are, I think we'll continue to see a push towards the more defensive sectors, push more towards value, that broadening play.

I think we're going to see that happen and we should continue to see things like V-Flow do well, quality ETS, things that are either focused on the bottlenecks or the broadening type of exposure that has that quality tilt. and maybe a little more defensive tilts to it. So I think it should be an interesting second half of the year. Cynthia, I was teasing John before he came on because John Mayer, you know, and John Mayer. And I said, well, what's the link from John Mayer to what you do? And we have landed on slow dancing in a burning room. You want to explain the theory behind this, how this goes into investment thesis? Yeah, you don't want to be caught in that burning room.

You want to kind of expand out. So if you're just going to focus on memory, I would say you focus on something broader than memory. You can stay thematic. You can stay with technology like J-Tech, which I talked about earlier. If you want to reduce your volatility, you stay with something like J-Pee. International. We haven't really talked about international. Flows into international have been super strong.

$190 billion a year to date. That's half the year. Last year was $220 billion the full year. So NATO is spending more individual companies, a defense spending. banks are improving. So Europe is becoming a thing. So just focus on the slow dancing, just not in the burning room. Yeah, get out of the room.

That does it for ETF Edge, the podcast. Thank you for listening. Join us again next week or head to etfedge.c.c.com. Over the last few decades, technology has transformed our world in amazing ways. Through it all, Investco-QQQ-Q-ETF has connected investors to the forefront of innovation. Access the future today with Invesco QQQ. Let's rethink possibility. There are risks when investing in ETFs, including possible loss of money. ETF risks are similar to those of stocks. Investments in the tech sector are subject to greater risk and more volatility than more diversified

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