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ETF trends: Investors focus on energy, semiconductors, and inflation

ETF Think Tank Director of Research Cinthia Murphy joins Yahoo Finance Live to discuss investor sentiment and the latest ETF trends in energy, chip ETFs, and inflation hedges.

Video transcript

ALEXIS CHRISTOFOROUS: I want to bring in Cinthia Murphy, director of research at ETF Think Tank. So Cinthia, I know that energy is still a central part to this story, as we see tensions escalate between Russia and Ukraine. I'd love to know how that's playing out right now in the ETF space. What areas are seeing the most money flowing in? And where are the biggest opportunities at the moment?

CINTHIA MURPHY: Hi, Alexis. Yeah, it's not surprising that energy is playing a central role in any story that relates to Russia and the whole conflict with Ukraine. What's been interesting in the ETF space is that when you look at flows, you are seeing some money start to pop into funds like USO, which is the WTI crude oil ETF, or even BMO, which is the Brent crude oil ETF.

But most of the money is still going to your more-- to more broadly diversified energy ETFs, like classic funds like XLE, your SPYDR energy sector. You've seen some money actually going into funds like XLP, so the investment there is really about the energy, the energy companies, your miners, your exploration names, more so than just your oil futures plays. So it's been kind of interesting that there's still a little bit-- it looks like a little bit of a caution before jumping into the traditional USO fund. That's where we tend to see all the action happen anytime there's anything happening in the oil market.

ALEXIS CHRISTOFOROUS: But I'm wondering if the conflict between Russia and Ukraine sort of reignites alternative energy ETFs. Like, for instance, can clean energy, you know, possibly be a winner here?

CINTHIA MURPHY: In theory, yes, and I've been reading a lot of analysts out there are starting to make the case for that. And the thing with clean energy is if you remember in 2020, they had a spectacular year. They rallied dramatically, three digit gains, funds like ICLN and TAN, the solar power ETF. But they've been really beaten down since. And they kind of fell, you know, with all the growth names that really faced that correction.

So in a way, you know, if you really think that this whole dependence on countries like Russia for oil, it starts to really build a stronger, longer term case for the energy transition, which is the case we've been hearing for a long time anyway. This just adds to that story. You could see them maybe at these cheaper valuations.

Some of these clean energy [INAUDIBLE] start to look good again, even though we're not quite sure what the future of growth stocks look like, which a lot of these companies tend to fall into that category. So it'll be really interesting to see if this conflict unfolds in any more dramatic way, if that opens a new door for clean energy stocks to have a second momentum, second wind, if you will, in your sails.

ALEXIS CHRISTOFOROUS: I want to switch gears and move outside of energy and move into semiconductors. I know that last week, AMD, which has been on a tear, surpassed Intel in terms of market cap for the first time ever. What's investor appetite for semiconductor ETFs, especially given the fact-- a lot of people might not know this-- Ukraine actually provides about 90% of gases needed in semiconductor manufacturing. So any sort of supply constraints there could just add to the issues we're seeing with the chip shortages.

CINTHIA MURPHY: Yeah, semiconductors are always a great spot to really get a sense of investor sentiment because semiconductors are in almost everything that we use today that is of any kind of electronic significance. And, you know, we saw that space peak during the pandemic and then kind of take a breather. But year to date alone, which we're barely two months into the year, a fund like [? XMH, ?] which is one of the biggest semiconductor ETFs out there, already picked up more than $2 and 1/2 billion in assets.

So investors are definitely putting a lot of money to work in the semiconductor ETF space. And can you imagine another chip shortage now caused by Russia? It felt like we were just getting past, you know, a lot of the shortage stories when it comes to chips. But maybe we'll be heading back there. And so it's another spot that would be interesting to watch, depending on how long this conflict lasts.

ALEXIS CHRISTOFOROUS: And you say, Cinthia, that fighting inflation sort of maybe where the tactical focus is right now. How are investors playing that? Are they playing it in other areas of commodities outside of energy, maybe in agriculture? We see that that's been pretty volatile, given the fact that Ukraine is sort of the breadbasket to the world.

CINTHIA MURPHY: Yeah, it's one of those things, you know, when we talk about how are people playing. And it's that idea of you can predict-- in oil markets, for example, you can predict that we're going to go above 100 because we're going to have another supply issue, and the conflict is going to really shut down pipelines and everything. You could also argue that with UT coming and higher rates, that we actually end up seeing a slowdown of the economy. So demand can actually slow down, which would actually soften the prices of oil. So that makes that try to figure out what the market does next so tricky, which is why we work every day in this industry, as you know.

But, you know, I think the overarching theme there stays true that is not Russia-led, but Russia adds to it, is just the fighting inflation. All of the supply issues lead to inflation. I'm starting to read analysts predict 10% inflation. So fighting inflation, I think, becomes more and more an important topic. And what's interesting, typically, people do that either by buying gold ETFs or agricultural commodity ETFs, which have been running a lot, energy, your classic plays.

But we've seen in the ETF space, a lot of ETFs come out targeted at combating inflation. So funds like IWIN from Amplify invests in a mix of commodities, real estate, landowners. It has a Bitcoin allocation in there, so just a diversified basket of assets that should either hold their value or benefit from inflationary environment instead.

And there's another fund, the INFL, same kind of setting, but it's just stock-based. It's just a bunch of stocks that they believe will do well in an inflationary environment. So just the idea of adding to your portfolio ETFs that are designed to benefit from rising inflation because at the end of the day, all of this we're talking about, conflict and supply issues, the most likely result is, you know, even higher inflation than what we're dealing with today.

ALEXIS CHRISTOFOROUS: Yeah, unfortunately, yeah. Well, always thanks to you for bringing along those specific ETF ideas. Cinthia Murphy, director of research at ETF Think Tank.