ETF Prime: Kirsten Chang on Fund Flows and More

To begin, Geraci took a step back and noted that the ETF flows have largely been reflective of the S&P 500’s strong performance. As such, he asserted that investors are continuing to drive funds towards ETFs tracking the S&P 500 and Nasdaq 100. 

Chang agreed, noting that the “plain, vanilla index-based funds continue to dominate.” In particular, she highlighted that the Vanguard S&P 500 ETF (VOO A) and iShares Core S&P 500 ETF (IVV A) continue to do well in terms of flows. 

As for why these more straightforward ETFs are seeing strong flows, Chang attributes it to the strong market rally. Given that the market is performing well, it can make sense for investors to stay engaged with the more simple and reliable products. 

Additionally, Chang highlighted that equity flows are currently approaching a record 12 months in terms of inflows. Right now, these flows sit around $700 billion, according to Chang. 

Another factor helping these core equity ETFs is their low net expense ratios. Chang noted that the lower cost of entry is making it easier for investors to stay engaged in the market. 

“Not only is the retail investor wanting to pay less, but for a systematic, cost-conscious institutional investor who’s trading in and out of the market in hefty blocks all day, every day, you know, nine basis points versus five versus two or three makes a big difference,” Chang noted. 

With all this equity enthusiasm in mind, Geraci floated the threat of concentration risk. He asked Chang if she thinks it would take a “significant pullback” to change the narrative of sticking with tried-and-true equity ETFs. 

“I do think we really have to see the record value derailed in some way in order to see significant pullback  from some of these larger funds,” responded Chang.” And yet, from a strategic point of view, these are still the places to be.” 

She noted that the top 10 stocks within the S&P 500 make up 37% of the total market cap. With concentration risk not going away anytime soon, Chang added that advisors are trying to get their clients to diversify away from the Mag 7. These include funds focusing on small- and mid-caps, or ETFs that exclude the top tech companies from their portfolios. 

Looking at overall ETF inflows, Geraci noted that total ETF inflows for 2024 currently sit around $830 billion. With the annual record sitting at $910 billion, Geraci told Chang that not only does he expect 2024 flows to beat the $910 billion record, but the market has a good shot at getting past $1 trillion in yearly inflows.

Chang asserted that “we’re easily on track” to beat the $910 milestone. She agreed with Geraci that we could very likely see slows pass $1 trillion by the end of the year. 

Already, the ETF market has seen over $10 trillion in total assets. Should ETF flows in Q4 keep pace with Q3, Chang expects that “we’ll be in good shape” to get over $1 trillion. 

She noted other factors that are driving strong ETF flows as well. As an example, actively managed ETFs have encompassed about a third of all inflows this year, even though these products only represent about 7% of the ETF market. 

Additionally, investors are continuing to drift their assets out of traditional mutual funds, instead opting for the more straightforward ETF wrapper. These also include options-based funds, such as defined outcome funds.

These defined outcome funds highlight the importance of innovation in the ETF space, according to Chang. Other innovative products, such as active fixed income ETFs and leveraged single stock ETFs, have persevered with strong inflows as well. 

“The catalysts for continued massive inflows are still very much intact,” Chang noted.

To close out this week’s podcast, Geraci was joined by Meb Faber, chief investment officer at Cambria Investment Management. Given Cambria’s expertise in tax-efficient investing, Geraci asked Faber to provide context on the importance of taxes when it comes to investing 

Faber began by highlighting how investor funds have continued to squirrel away from mutual funds, in part due to traders seeking more tax efficient options. As Faber noted, ETFs offer lower costs, transparency, and tax efficiency.

With all this in mind, Faber pointed out how many issuers are converting their mutual funds into ETFs. While some may be doing so to broaden their investor base, others are making the move to promote more tax efficiency.

“People are waking up to tax alpha,” Faber adds. “You know, we love to talk all day about the best investing opportunities, but if you look at what’s the easiest way to generate returns, well, it’s lower fees.”

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