Investors shun popular low-risk ETFs

Yahoo Finance’s Alexis Christoforous and Todd Rosenbluth, Head of ETF and Mutual Fund Research at CFRA, discuss why investors are looking to riskier plays.

Video Transcript

ALEXIS CHRISTOFOROUS: It is time now for our "ETF Report," brought to you by Invesco QQQ. And joining me for that is Todd Rosenbluth, he is head of ETF and Mutual Fund Research at CFRA. So, Todd, I was a little shocked to read in your note that you say investors have recently shunned two of the most popular lower volatility ETFs. Which ones are they, and why do you think they're doing that?

TODD ROSENBLUTH: So USMV, which is the iShares product, and SPLV, which is in Invesco product-- $11 billion have flown out since the beginning of 2020. Now, these are low-risk or risk-off equity strategies that take a more defensive approach to investing. And we've certainly been in a risk-on environment in the overall market. So these funds have actually lost value while the S&P 500 has gained about 17% within the past year.

So investors have been embracing risk. They're not as eager to be tied down to a more defensive strategy. But as we're starting to see a correction, and the last day and a half is certainly a sign that a correction is possible, then you want to be able to have more of a seat belt approach-- something that can protect you on the downside, but gain some of the upside that you'd get with traditional equities.

ALEXIS CHRISTOFOROUS: When you say, a correction, do you mean a drop of 10% or less than that? What are you looking at?

TODD ROSENBLUTH: We do. We at CFRA think there is an increased likelihood that a 10% or more decline in the S&P 500 is in the foreseeable future. The market has been at extreme levels based on a number of indicators that we are looking at-- whether you're looking at how well growth has outperformed value, how strong small caps have performed versus their rolling average. And we just think that there's too much optimism in the marketplace, and a correction is inevitable. It's more of a question of when, not if it will happen.

And investors have historically been better off protecting the downside of their equity portfolio than trying to time the market by moving out of it. And so a strategy like SPLV that has more exposure to health care and consumer staples, and less exposure to some of the more cyclical sectors like energy, and financials, and materials that have done the best, that strategy like SPLV is better positioned to protect you than having just exposure to the S&P 500.

ALEXIS CHRISTOFOROUS: Are you seeing the trend that we're seeing in the market right now play out in the ETF world-- in the sense that investors are rotating out of those growth and high tech stocks? And where are they going, if they are?

TODD ROSENBLUTH: Yeah, well, we are starting to see it. I mean, some of the stronger, more thematic-oriented ETFs that are growth-oriented-- whether actively managed products, like ARKK's product-- ARKK is the ARKK innovation ETF. That's been very popular in the last couple of months-- very high growth strategies. It owns Tesla, but it owns a number of genomics companies-- Square, to name some of those positions.

We've started to see investors rotate out of those strategies. We think fixed income is an area where we've actually started to see investors having more comfort in some of the more stable core bond strategies. But there'll always be a rotation. And the good thing about ETFs is you can move in and move out intraday without paying much of any of the trading costs and without paying any commissions.

ALEXIS CHRISTOFOROUS: Yeah, exactly. Todd, before we let you go, why is Wells Fargo, a large financial services company, not in the ETF game in the same way American Century or Fidelity is?

TODD ROSENBLUTH: We don't know. I mean, that's a deal that just got done today to private equity. And I don't think that they're talking about ETFs. They're really missing the opportunity. We've seen mutual fund companies-- as you mentioned, American Century, Fidelity. T Rowe Price, others that have entered with actively managed equity ETFs and had some success.

We think you have to give investors a choice of the ETF wrapper or the mutual fund wrapper. Going just mutual funds alone is likely to result in more asset bleeding and missing the boat, as where the pendulum has really swung towards ETFs.