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Investors ‘have been rotating into lower-cost ETFs,’ expert says

Todd Rosenbluth, head of research at VettaFi, joins Yahoo Finance Live to break down the latest in the ETF space, including why bond ETFs saw inflows in May.

Video transcript


- Welcome back. It's been a rough year for bond investors so far, especially with the backdrop of the rising rate environment. And while bond mutual funds have seen outflows last month, it's been the opposite for ETFs.

Well, joining us now, Todd Rosenbluth, VettaFi's head of research. This ETF report brought to you by Invesco QQQ. So Todd, talk about this divergence then. Why are we seeing it? And what are the most appealing aspects of the ETF market right now?


TODD ROSENBLUTH: Well, let's set this up. We've seen money moving out of equity mutual funds for years and money moving into alternative index-based equity ETFs. But bond mutual fund investors have been relatively loyal. This year, the Barclays on Bloomberg AG is down 9% year to date through May.

The average bond mutual fund is down exactly that same thing, 9%. So what we're seeing is investors have been rotating into lower-cost ETFs from iShares, from State Street, from Vanguard, among others. They get the cost savings. They have the ability to do some tax loss harvesting and get the benefits of higher yield. And they're much more liquidity tied to fixed income ETFs than they are mutual funds.

So this is a trend we at VettaFi think is likely to continue. We haven't seen the flows up until this year that had been dominated with fixed income ETFs. But at VettaFi, this is something we're tracking for the second half of the year to continue.

SEANA SMITH: So Tom, what switched this year? Was that the inflation picture? Was it worries maybe about an economic slowdown? I guess why do you think we are seeing that switch today?

TODD ROSENBLUTH: So 9% losses. When you lose money, you're more cost conscious than beforehand. You're more focused. Every basis point that you pay more to an asset manager eats into the yield that you're going to end up getting each into the returns. And it's fine if you're making money or you're holding water and treading water.

But to be able to have access to ETFs, like MUB, that we're showing on the screen, that are very low cost to get exposure to municipal bond marketplace with the diversification and liquidity, that's an advantage for ETF investors. And we think that's likely to continue as long as the bond losses for the average mutual fund stay in the high single digits.

- And in your notes, you talk about some under-the-radar high dividend-yielding ETFs that people should be considering. What's on that list?

TODD ROSENBLUTH: Right, so we at VettaFi recently did a survey of advisors. And when they talked about where they were getting income or seeking out income, it wasn't the bond funds. It wasn't bond ETFs. It was actually high dividend-yielding equities.

So we decided we would take a look at where the money has been going and then where we think perhaps it should be going with some potential under-the-radar ETFs. And this is a piece we published earlier today. If you go to VettaFi or you go to, which is now part of VettaFi, you'd be able to see that.

We highlighted a few different ETFs. One of them is S-D-O-G-- SDOG. Easy ticker to be able to remember if you have a pet at home. It's diversified across the sectors with the five highest dividend-yielding stocks on an annual basis to be able to give you exposure to that high income but without taking on too much risk or the heavyweight in utilities or an underweight in technology.

Another ETF that we like is the Global X SuperDividend ETF. The ticker is DIV. Now, this looks at the highest of the high dividend-yielding stocks. Its yield is above 5%, gives you a high income component, but a heavier weighting towards utilities than we'd see within that SDOG ETF.

SEANA SMITH: Hey, Todd, what are fund flows looks like? Are people waiting on the sidelines ahead of tomorrow's inflation print?

TODD ROSENBLUTH: We haven't seen that. Investors are putting money to work using ETFs. We've seen the three S&P 500 ETFs, IVV, VOO, and SPY be popular. In recent weeks, investors have rotated back into the equity markets willing to take on a bit more risk. And as we touched on earlier, May was an excellent month for fixed income ETFs that roughly $32 billion that flowed in during the month of May was equal to what we saw in the first four months of the year.

So we're really seeing investors that are doing so moving into ETFs. And when they go to our platforms at VettaFi, they're searching for income strategies, including some of those high dividend-yielding strategies that we talked about.

- And on the reverse that in terms of ETFs that aren't looking as attractive to you-- what people should rotate out of, what sort of formula are you using to determine that?

TODD ROSENBLUTH: Well, we have seen a rotation away from growth and a rotation towards value for much of the year. Growth has underperformed. Investors are more conscious about the risks that they're taking within the equity marketplace in a rising interest rate environment.

And so we've seen value-oriented ETFs. Vanguard Value ETF in particular being popular this year relative to Vanguard Growth ETF. And you notice that in a note of performance differential between them. These dividend ETFs that we've been talking about are much more value-oriented than growth-oriented. So they've been in favor. But growth technology strategies, those have pared back from investor sentiment.

SEANA SMITH: Todd Rosenbluth, thanks so much for taking the time to join us.