ETF Prime: Tom Lydon on Record Flows and What to Expect Next

Lydon looks at how the record ETF flows have been aided by the financial markets in the first half of the year. Yet there’s plenty to say about potential risks to come in the back half of the year. As of last week, inflows have topped the $500+ billion that went into ETFs in all of 2020. ETFs have come from humble roots to truly astronomical figures.

Lydon notes a couple of drivers for the flows. One is how most of the money in 2020 has gone into fixed income. This year, it’s close to a quarter of that amount in the sector, with a large number of stocks instead beating expectations, leading to all of this growth and high numbers. U.S. equities, in particular, seem to be in a powerful position.

Low expectations from investors and minimal guidance from the companies they are investing in means exceeding analyst projections, which inspires investors to continue buying. Additionally, the Fed has been on investors’ side for many years, and that’s not looking to stop anytime soon.

Lydon adds: “I would also say investors tend to be more disciplined. They don’t get shaken at all. If there tends to be a correction, they don’t run away. In fact, they buy on the dips. So, we’ve been continuing to see more people take advantage of any corrections that have come.”

Looking to the other side and what could derail ETF flows in the broader markets, Lydon points to the delta variant strain of COVID-19. In addition to the increased healthcare concerns, the emotional concerns that come with it could push the market in unexpected ways. 

“The big question is, are advisors and investors going to tweak their portfolio because of more concern on the Delta variant. Time will tell.”

Inflation is another serious concern for advisors. While the Fed is trying to assure everyone that it is not a concern, it’s a real thing to hold onto for advisors and investors.

More pressure comes from China. The world’s two largest economies continue to push each other back and forth. However, it’s not a new problem area, and both parties do want growth.

With that in mind, as both economies tend to be intertwined, will it come down to which side has the sharper tools at its disposal? Once again, “time will tell.”

Valuations are another factor, Lydon states. They are currently cheap in the U.S., but for value investors, it’s clear that this hasn’t been the best for their portfolios. There are some great valuations to be had in certain areas in the market, but this certainly is not the 1990s.

Moving forward, for Lydon, income is growing increasingly important. Advisors have to look into many risks and weigh how best to handle various allocations reflective of the current market landscape. Taking on credit and duration risks may be necessary.

Later on, CEO Bruce Bond covers defined outcome ETFs, which offer exposure to various segments of the market where there’s a cap to the upside and downside protection. That’s essentially a buffer to help offset declines. This has been one of the fastest-growing ETF categories at over $7.5 billion, of which Innovator makes up about $5 billion. All of this in just three years, no less, allowing for plenty of talk concerning how these ETFs work and how to best use them in a portfolio.

Rounding out the episode, Senior ETF Analyst Eric Balchunas was ready to field plenty of Twitter questions, ranging from good market information to favorite alternative rock songs. There’s also a discussion of the Bitcoin ETFs and Balchunas’s “higher power theory” on why there hasn’t yet been a fund created for this cryptocurrency.

For more ETF Prime podcast episodes, visit our ETF Prime channel.