Live at Exchange: ETF Nerds Address Advisor Concerns

ETF Trends and ETF Database asked advisors the same question four weeks ago, and geopolitical risk was the top concern, trailed by rising rates and inflation, Tom Lydon, CEO of ETF Trends and ETF Database, said at Exchange: An ETF Experience. The switch in polling data signals that advisors are pivoting their focus back to record-high inflation as the Ukraine-Russia war has baked into markets.

Matt Hougan, CIO at Bitwise Asset Management, said that the advisors he is talking to are worried about negative real interest rates and creating enough income for their customers to keep up with inflation.

“That’s why you’re seeing the rotation into dividend-paying stocks and out of bonds because you have negative real interest rates in bonds unless you go way out on the risk curve,” Hougan said. 

Lara Crigger, editor-in-chief of ETF Trends and ETF Database, pointed to the polling results, which showed that only 2% of advisors are worried about dividend sustainability.

“People are not worried about dividends. They’re in fact flocking to dividends,” Crigger said. “If you were in the last session, we talked about how dividend strategies have seen monster flows over the last six to nine months.”

Hougan said that the current environment is driving investors to look for crypto income opportunities to create income that can keep up with inflation. He added that advisors are also worried about unexpected, sustained inflation during a time of economic downturn. 

“They’re worried about the tail risk that exists in portfolios which have gotten fatter — so they’re looking for solutions for that, and then they’re looking for solutions for income,” Hougan said. “One challenge I see with a lot of inflation-focused products is they’re trying to solve both of those problems at the same time, and they’re really different problems. One’s a tail risk problem, one’s an income problem. I think advisors need to think about different products to solve different solutions.”

Elisabeth Kashner, director of ETF research at FactSet, said that it is still an opportune time for investors to gain exposure to products that can help their portfolios weather all market environments. 

“I think we all forget that bond funds will take a price hit straight up, and so you’ll see like a real hit to your balance sheet, but on the flip side, you do get a higher coupon going forward, and your future total return will be that much more robust,” Kashner said. 

Kashner added, “If you missed the correct inflation play, you’ve got a little bit of an uncomfortable conversation with your client right now, but I think six to nine months from now, you’re going to start to really appreciate it and those dividend funds that are actually underperforming their market share right now year-to-date in terms of flows. I think there’s a reason that you don’t have to reach for rates as much.”

Ben Johnson, director of global ETF research at Morningstar, said that while there are products for every market environment, it’s important to be properly allocated before it is necessary, emphasizing the need for maintaining a properly diversified portfolio.

“Now we have an ETF for every function you can think of,” Johnson said. “We’ve got inflation ETFs, we’ve got stagflation ETFs, we’ve got deflation ETFs, all of which can be perfectly good tools, but you have to be out there mending the hole in the roof of your house while the sun is shining, and not in the middle of a downpour.”

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