Fixed-income ETFs could promise stability amid market volatility

Todd Rosenbluth, Head of ETF and Mutual Fund Research at CFRA, joins Yahoo Finance to discuss ETFs amid China's market instability, low volatility ETFs, and continued demand for fixed-income ETFs.

Video transcript

ALEXIS CHRISTOFOROUS: All right, taking a look now at our ETF report brought to you by Invesco QQQ, I want to welcome in Todd Rosenbluth. He is Head of ETFs and Mutual Fund Research at CFRA. Hey, Todd, always good to see you. And I always love when you bring your picks along.

So you actually are focusing on China this week. Makes sense with the Evergrande news. And I'm just wondering if between yesterday and now today, have you seen a pickup in interest in some of these China ETFs on the heels of news that one of its largest real estate developers is on the brink of collapse?

TODD ROSENBLUTH: We're certainly seeing there's people who are willing to go in to the Chinese marketplace. We've seen an ETF, KWB, K-W-B, has been very popular for all the challenges that China has been facing. People are bottom fishing. They're trying to find an opportunity to get in for the value stocks. We offer caution on that. We think that KWB still has a lot of risk.

And we think investors should and are likely to continue exposure to China through more broadly diversified ETFs, like IEMG and VWO from iShares and Vanguard respectively. They have about 30% exposure to China, but you get exposure to other perhaps more stable emerging markets, like South Korea, like Taiwan, like India. You get the benefits of diversification. So we think there's obviously some people who are running in when they see falling prices, but others perhaps are being more rational and being more cautious.

ALEXIS CHRISTOFOROUS: You know, yesterday, we saw the return of volatility to the market. I mean, we've had that really calm stretch for quite a while now, Todd. And yesterday, we saw the VIX index, which is an indicator of all of the volatility. We saw that up 30%, highest we've seen since I think it was May. So what can investors do who want less exposure to volatility when they're looking at ETFs?

TODD ROSENBLUTH: Right, so you, of course, it would have had a very strong run if you invested in the S&P 500 with IVV, VOO, or SPY. But you can take a lower risk approach with an ETF, SPLV, which is the Invesco S&P 500 Low Volatility ETF. It is a higher weighting in real estate, a higher weighting in consumer staples, a higher weighting in those more traditional defensive sectors than the broader marketplace.

And you mentioned those held up better yesterday, and in some cases, are holding up better today. If you want to take on slightly more risk, there's another ETF, USNV. That's from iShares. That has less volatility within each of the sectors. So it has more exposure to technology stocks, more exposure to consumer discretionary stocks, than you'd find within SPLV, but in the lower risk names.

So these are lower risk ways of getting exposure to the equity marketplace, being able to limit the downside, as well as participate in some of that upside potential that we're seeing if we have a bounceback continuing into the rally, into the end of the close, and to the rest of the week.

ALEXIS CHRISTOFOROUS: Todd, I just want to speak more broadly about what you're seeing in the ETF and mutual fund space right now because, you know, September has been a rocky month so far for the market. It is historically not a great month. Have you seen trends shifting recently with investors in terms of where they're putting their money, or are they taking their money out of areas that they were committed to just a few weeks ago?

TODD ROSENBLUTH: Well, we're seeing continued demand for fixed income ETFs in particular. That's an area of focus. We probably don't spend as much time within the industry. It had record inflows in 2020. We started seeing more interest in corporate bond ETFs last year. We've seen a rotation, more focus on inflationary oriented ETFs, more exposure to municipal bond ETFs and the broad aggregate markets.

And what's particularly interesting to us at CFRA is we're seeing actively managed fixed income ETFs. So I think you're showing some of them on the screen, MINT, JPST. These are some of the ultra short oriented bond ETFs, and then some of the higher yielding actively managed ETFs that you're showing on the screen for people who are willing to take on a bit more risk.

We're seeing 17% of the overall flows to fixed income ETFs has been to actively managed ETFs. This is still 4% of the overall ETF universe. People tend to think of ETFs as tracking an index like the S&P 500 or the Bloomberg AG. These are actively managed ETFs where you get the benefits of security selection, but within an ETF wrapper.

ALEXIS CHRISTOFOROUS: And Todd, finally, I know this is climate week. It's on the agenda as leaders meet at the United Nations this week. President Biden was at the UN this morning, speaking about the need for everyone to work together toward climate change. What are you seeing in terms of ETFs that surround climate change and ESG? Is the interest still as strong as it was earlier this year?

TODD ROSENBLUTH: It is. So ESG oriented ETFs, particularly broad market ESG ETFs, have been particularly popular throughout the year. We've seen iShares with ESGU be extremely popular throughout the year, but some other players, too, so that people probably don't think of the same way within the ETF space.

So Nuveen is one of those players that we've seen broaden their ETF lineup with ESG over the last few years and see significant success. They're gathering billions of dollars of assets tied to some of their ESG oriented ETFs. We think they're one firm to watch.

ALEXIS CHRISTOFOROUS: All right, Todd Rosenbluth, Head of ETF and Mutual Fund Research at CFRA, thanks so much for being on the show today.