Midyear ETF Opportunities

The VettaFi Research team is joining that effort. We are hosting a Midyear Market Outlook Symposium next week (sign up here) with a number of guests, diving into where we’ve been and looking into where we may be headed from an opportunity set perspective. It’s been a busy year across ETF land – and markets, more broadly – and there’s a lot to discuss, so let’s consider a few trends we’ve observed so far this year.

Just about every investor survey we’ve come across this year landed largely in the same conclusion about sentiment: Investors are optimistic, but cautiously so.

With U.S. stocks delivering strong performance, hitting new record highs time and time again, it’s easy to understand the bulls. Who would want the party to end? But we’ve been hearing that our collective bullishness is growing a little bullish-ish as the year progresses.

Macroeconomic data has been mixed at best, with inflation stickier than originally expected; jobs not painting as rosy a picture; consumers lacking complete confidence in retail therapy; and so on. Add to that an abundance of geopolitical risk, and potential heat in our own backyard come November’s Presidential Election, and it makes sense that a call for caution is getting louder.

We are headed into a second half of the year largely positive on the equity market and the opportunity set, but not ignorant to the many lurking risks.

That call for caution has been interpreted as a call for additional asset-level and portfolio diversification, a focus on alternatives (which have been one of the fastest growing ETF categories this year), a search for quality, especially among growth equities, and a hunt for sustainable, dependable income in both traditional and alternative form.

It has also led to a wave of downside protection-type product development and adoption – including 100% downside buffered portfolios – as investors look for ways to have market participation without too much heartburn.

When it comes to the prevailing mood among investors and market participants – and the impact that mood may have on the opportunity set – there seems to be little to suggest that we are ready to throw caution to the wind.

A lot of what’s giving us pause as we think about asset allocation for the current environment hinges on what happens to interest rates. It’s been remarkable to see the speed with which we went from pricing in at least six rate cuts in 2024 to wondering if we will see even a single one this year.

It’s hard to have conviction on a moving target that keeps moving.

That said, the path of rates will remain crucial to the path of potential returns ahead, especially among high flying growth stocks, fixed income portfolios and rate sensitive assets. We can’t help but try to figure out where rates are actually going, so we’ll continue to hang onto every word from the Federal Reserve. We, as investors, are Fed dependent, and our portfolios need to be Fed proof, ready for any kind of weather.

Headed into midyear outlook season, the Fed has signaled that at least one rate cut lies ahead before the year is out. Is it actually going to happen? Who knows?

But we’ve already started to see ETF model portfolios from big asset managers start to add duration and introduce or increase credit risk to portfolios. We’ve also seen them (BlackRock, State Street) broaden diversification both globally and in size and style. These are just some examples of where big money is seeing opportunities in an uncertain rate world.

Rates will remain a central theme in the second half of the year.

Exciting product development, big-name firms entering the space and all-around lower fees have fueled a boom in actively managed ETFs this year. The highly publicized growth of the category has been marked by both number of new ETFs and asset flows.

We expect the active picks and shovels to only get sharper from here, and investors to continue broadening their implementation of these tools. Nothing suggests a slowdown. But performance could bring a reckoning for many newcomers, as expectations that active means alpha generation bring scrutiny to the category.

Active management is a positive trend for the ETF industry, but the massive amount of money that has gone into low-cost beta ETFs this year is a reminder that passive is no wall flower. Funds like Vanguard VOO and VTI, State Street’s SPLG, Invesco’s QQQ and QQQM as well as iShares’ DYNF and AGG are all among the biggest asset creations this year. Vanguard, as a firm, has seen massive growth. Passive, index-based investing remains a force when it comes to delivering solutions for investors looking to participate in markets, and innovation in the space is alive and well.

As far as big industry trends go, we will continue to watch this excitement over active management in ETFs with an eye on live track records for the many newcomers, as well as adoption trends that reveal where investors are finding real value.

We’ve all been a little obsessed with digital assets in the ETF space this year. The arrival of spot bitcoin ETFs and the (expected) looming arrival of spot ether ETFs, both tangled in a politicized debate, have made for great storytelling. Nothing suggests this story is about to die down.

But it’s been interesting to see the themes emerging from adoption data. New-to-market funds like IBIT and FBTC sit today among the year’s most popular ETFs, leading us to believe in broad adoption and investor demand for access to crypto through ETFs.

Some macro watchers like Jim Bianco, of Bianco Research, however, have shared a more cautionary view. In a series of posts on X earlier this year, Bianco suggested that it’s not advisors but “momentum chasing” among “paper hands” that have fed early spot bitcoin ETF demand. Read: not sticky money in the case of performance trouble. Citing a Citi study, Bianco noted that advisors own less than 1% of spot bitcoin ETFs. (see @biancoresearch)

Is broad advisory adoption of spot crypto ETFs on the horizon? Going into the second half of the year, we will stay tuned to this developing story. The nascent adoption of spot bitcoin ETFs is going to be an interesting chapter ahead as we better understand drivers of demand, segments of investors and applications of these ETFs across client portfolios.

There’s so much more to discuss. Come June 27, we’ll be talking about macro expectations, asset class opportunities and product development we’re seeing in our Midyear Market Outlook Symposium. We invite you bring your questions and join us. A simple registration can be done here.

See you there!

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