ETF Edge - Outlook 2025 Begins 11/25/24

Episode Date: November 25, 2024

The ETF industry is about to wrap up another recording setting year. But 2025 will be a whole new ballgame.       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're in the right place. Every week, we're bringing you compelling interviews, thoughtful market analysis, and breaking down what it all means for investors.

I'm Pippa Stevens, in today for Bob Pizzani. The ETF industry is just weeks away from wrapping up another record-setting year. But what could the new year hold? It's the start of our outlook 2025. Here's my conversation with Todd Rosenbluth, Director of Research at TMXVETI, and Dan Egan, managing director of behavioral finance and investing at Betterment. So Todd, I want to start with you here because can you just quickly recap for us where we've seen the biggest inflows this year? Well, pretty much everywhere. This is a record year for ETF flows for the overall industry. We've passed the $925 billion mark. It's a record inflows for fixed income products.

We've passed a $275 billion mark. Vanguard 500 ETF VEO has set a record. It was the first to pass the $50 billion mark. It's past that $100 billion mark of net inflows for just one ETF. IVV from I Shares has hit that mark. We've seen tremendous flows for the ETF industry overall, but we're seeing, lots of other smaller ETFs that are gaining key milestones, hitting key milestones, and we can talk about those along the way. But it's been a tremendous year for the ETF industry.

Yeah, marching towards that $1 trillion mark. Now, of course, post-election, we've seen some pretty wild volatility on the institutional investor side. Now, Dan, are you seeing the same thing with retail investors? No, we're not. It's been relatively muted this year. I think the fact that it doesn't look like we're going to have any disruptions between now and January 6th, meant that there was less uncertainty in the markets, which meant that things settled down a little bit. We did see some blips, as always, right around Election Day about as people sort of felt rather than thought about how things would come out. A little bit of churn there, but nothing that is sort of outstanding or unusual for a November

election. And I guess, Dan, we've seen the outperformance of some Trump trades, as we're calling them, things like financials and energy stocks. Have you seen kind of retail investors following those trends? Less on a concentrated side and more on a generic, like I think the market's going to do well or I'm worried about how the market's going to do. Over the past 10 years, maybe even a little bit more like 20 years, we've seen partisanship slip more and more into portfolios, just in terms of like generic market outlook,

nothing specific about policy, but just more sort of I don't feel good there for I'm going to be more pessimistic about the market. We've seen that this year a little bit as things have split along each side, but hopefully the optimist and the pessimist balance out. All right. And Todd, you expect a general widening out of investment away from the tech concentration into other parts of the market. What might the best way to capture that be? That's right. We expect some more dispersion in the winners. We saw the MAG7 stocks continue to drive the market this year. So we think an equal-weighted strategy. So Invesco has RSP, that's the S&P 500,

ETF, same large-cap stocks that you'd find in the S&P 500, just owning all 500 in rough equal weights. Goldman Sachs has a competing ETF. The ticker is GSEW. That's the Goldman Sachs, large-cap, equal-weight, U.S. equity, ETF, GSEW. It's not tied to the S&P 500, but it is large-cap companies. and it performs slightly differently.

It's another great low-cost way of getting exposure. Astoria has an equal weight quality ETF ROE. There's just lots of great ways to spread that risk around instead of concentrating in Tesla that has been quite volatile since the election. You can own a wide range of those stocks in one portfolio. We also think small caps are going to become more in favor in 2025. They started a perk up since the election. heading into the election as interest rates have been coming down. And we think that IJR is a great

way of getting exposure in a broadly diversified way. And S-Flow, which is a victory shares ETF that has a quality filter and a growth approach to it. And under the radar ETF from victory shares, but we think this ETF could garner additional attention. It's relatively new. So we think it's gaining traction with many advisors and investors. Yeah, small caps. certainly another one of those, you know, post-election Trump trades. And, Dan, for individuals, you know, do you think that investment decisions will still be driven by the water cooler stocks like Nvidia or will something else drive them? I know you've been looking at values with an S-investing, not to be confused with traditional value investing. Can you explain that a little bit?

Definitely. I think one of the things that might come back a little bit is that while SRI or ESG stocks are probably going to be out of favor policy-wise. There's actually a greater hope for them to come back in terms of if the Democrats aren't in a policymaking position, there's more to be said for taking on individual responsibility and investing in SRI or ESG funds almost as a form of rebellion or staking of your values. So while I don't necessarily know that it's a profit-seeking trade, I think there's going to be a little bit of revitalization of I want to invest in a way that is aligned with my values, which is not necessarily the policies, that I'm going to see implemented for the next four years.

Are there any trends you're watching specifically, any of the sub-verticles on the sort of value investing that you think might gain the most attention? No specific breakdowns. We have three separate SRI options for customers. We have a socially focused one, a climate-focused one, and a broad one. Each of those, we look for new ETFs as they come out to hit either a cost improvement or an exposure improvement.

The climate one has definitely been far away the most consistent leader because that seems to be an issue that everybody agrees on. There is still a lot of interest in the social aspect of it, and I'm interested to see what happens over the next four years. All right, let's shift here a little bit to rates because bond investing was big this year with a slew of new products brought to market. Todd, do you expect that to continue

and how important is maybe an uptick in inflation in that theme? So you're right. As mentioned earlier, we saw record inflows for fixed income ETFs in 2024. We think we're going to see continued demand for these products for a couple of reasons. We do think money is going to hopefully move off of the sidelines, moving out of money markets as bond yields come down in those money market accounts. And we think that short-term fixed income ETFs could gain additional traction. We've been seeing that throughout 2024. We think it will continue. PIMCO has one of those leading ETFs. It's an actively

managed ETF, M-I-N-T or Mint. This is their enhanced short maturity ETF. We think We think that ETIF from PIMCO, which has a very long track record, could gain traction. We think Newberger-Berman has an interesting short-duration, ETF, NBSD, that offers a bit higher yield. We could see continued traction for NBSD. And we think that we're seeing investors take on even more credit risk. We've seen high-yield ETFs gain additional traction this year. and we think investors and advisors may want to be a little bit more targeted. There's actively managed products, Tiro Price, among others has those products.

And we've also seen bond blocks have some success. Bond blocks has those targeted high-yield sector ETFs. And we think we could see investors gravitate towards those products. But fixed income ETFs are certainly here to stay in 2025. All right. So some tickers to watch there. And I guess, Dan, from the retail perspective, what are you seeing in terms of of interest in bond funds?

So it's definitely up a little bit. I think I want a caveat that as long as retail investors see or believe that savings rates, interest rates are going to be above inflation, they're probably going to stick with these high yield cash accounts. That's something that we've seen a bit. On the other hand, as in either inflation expectations rise, whereas the rates get lower to where the net of inflation value might be negative, we're definitely going to see a tipping point there.

We've been looking more at the targeting of tax smart. bonds so that the after-tax yield of the bond is optimized for the individual. So depending upon what state you live in, what tax bracket you're in, let's tailor what bonds you're getting exposed to. And I think that's got legs no matter what the yield environment is. All right, let's move on to one of the other biggest growth areas of this year, of course, Bitcoin and crypto. Bitcoin right now is sitting just under the key psychological level of 100,000. So Todd, with a new, you know, what some are saying, crypto-forward administration coming in, you know, what's the prospect for greater institutional involvement in Bitcoin and crypto markets widely?

So we've seen a tremendous year for Bitcoin ETFs. This has been the year of Bitcoin and other cryptocurrency ETFs in January of 2024. We saw the first of those products, Ibit, which is the I shares product, has been leading the charge. Institutional adoption, we think, is going to pick up in part because we now have options available. They first began trading on the NASDAQ last week. We've seen additional ETFs have options available.

That will allow institutional investors to become more involved. We've also seen a number of products come to market that are tied to Bitcoin and other cryptocurrencies that I think are interesting. So Nios, for example, launched a ETF BTCI, which is an enhanced income or higher income oriented version of getting exposure to Bitcoin. We know there's some firms that have offered some or filed for a structured protection ETFs. I believe Calamos is one of those. We think the industry is going to be even stronger in 2025 as more asset managers bring products to market tied to Bitcoin and other cryptocurrencies.

And Dan, I want to bring you in here as well because BlackRock's ETF had recently said something like 75% of its Bitcoin buyers are crypto fans new to the market. So do you think this will lead to? to further retail investor engagement in other parts of the ETF markets, or is it more equivalent to sort of sports betting on one big event? It's a great question.

I think it's much more of the former. As Todd said, I think this year we've really seen that crypto is now a mature asset class. It is, as some people have called it, digital gold. And so the question's gonna move from, you know, the timing of it in the short term and which coin. I think we don't really talk about which coins matter as much anymore.

It's primarily Bitcoin. And the question is, how do you manage it as part of an overall point? What are your rebalancing tolerances around it? How do you fit it in? What does it take away from? So I think it's matured, but it brings up new questions about how to make it part of an overall portfolio that you manage systematically. But Dan, we also heard from famed Bitcoin investor and hedge fund giant Mike Novogratz recently who said that there could be a big correction. Does that at all kind of stall retail investor appetite or do you think that we'll see buying on the dip if that does come to fruition?

Probably the latter. There is performance chasing on the way up. I think crypto has that particular, along with other meme stocks, has that sort of, you know, you want to hold when things go down almost as a matter of faith and toughness. So I think it's got legs for quite a while right now. All right. And just finally, since we are approaching the end of the year, I want to talk about your top predictions and your top market to watch for 2025. So Todd, over to you. What's your top thing to watch next year? Well, if we hit a trillion dollars, can we continue that momentum going? We think that we're going to see continued interest in actively managed ETS. We didn't talk about that today, but they've been continually punching above their weight. And we have firms like Capital Group and Fidelity and Tiro Price that have had a lot of success in 2024. Can that success continue in 2025? We think it can as we see more product development and as more investors,

get involved moving from mutual funds into ETFs. So can we continue to see another double digit percentage of flows to active ETFs? We think that can happen, but time will tell. All right, and Dan, your top theme to watch for next year. Especially in the ETF industry, I'm looking at bonds and specifically the tailoring

of bonds to different circumstances. So there's lots of good ideas. How do we get those ideas to scale inside of an ETF such that it's addressing possibly a smaller niche market, but one that's definitely sustainable. So a lot more diversification of ETS available. That does it for ETF Edge, the podcast. Thanks for listening.

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