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It was a tough year for investors as both stocks and bonds stumbled, but the ETF industry had a strong year despite sticky inflation and strong markets. Evan Harp chats with Todd Rosenbluth, Head of Research at VettaFi.

Evan Harp: Despite a bear market for US equity and fixed income markets, 2022 will be the second best year for ETF flows. Why do you think?

Todd Rosenbluth: that’s right. The US ETF industry in 2010 It could raise more than $600 billion in new funds by 2022, after a record high in 2021. In the past, when the market has been volatile, ETFs have been able to pull through. However, this year is different because the equity and fixed income markets are declining significantly, so advisors and end clients are investing money to face potential paper losses. ETFs have become the default choice for many advisors and clients because the products tend to be less expensive, more diversified, more accessible and more tax-efficient than mutual funds or individual securities. Advisors can switch to low-risk equity ETFs — such as Schwab US Dividend Equity ETF (SCHD) or the lnvesco S&P 500 Low Volatility ETF (SPLV) – or as short-term fixed income ETFs Vanguard Short-Term Corporate Bond ETF (VCSH) To meet customer needs and provide savings.

Harp: How are fixed-income ETFs raising new money when fixed-income mutual funds face net outflows?

Rosenbluth: The Bloomberg Aggregate Bond Index recently fell 11 percent for the year, and the average mid-core bond mutual fund was still lagging slightly, according to Morningstar data. Some advisers have used the sale as an opportunity to shift into ETFs that benefit from tax loss harvesting in 2022 and save client funds for 2023 and beyond. While fixed-income mutual funds represent less than 20% of total assets during the period they experienced net redemptions, fixed-income ETFs collected nearly $180 billion in net inflows, equivalent to a 30% share of the industry’s inflows. We’re also seeing advisors turn to equity-income ETFs for stable income without the same impact from Federal Reserve rate hikes.

Harp: Actively managed ETFs gain ground in 2022 What is driving this demand and can it last for 2023?

Rosenbluth: Active ETFs have been punching above their weight. At the beginning of December, they collected 14% of net income, although they represented 4% of the assets. Some of the drivers we’ve already touched on. of JPMorgan Equity Premium Income (JEPI) It is the most popular ETF with net income of nearly $12 billion by 2022. JPI’s management selects low-risk stocks that appear to be attractively priced and maximizes the portfolio’s income through covered call options. Meanwhile, active ETFs like these are less interest rate sensitive JPMorgan Ultra-Short Income ETF (JPST)of First Trust Enhanced Short Maturity ETF (FTSM)And PGIM Ultra-Short Bond ETF (PULS) They all raised $1 billion. We think demand will continue in 2023 as relatively new entrants such as Capital Group, Federated, Harbor Capital, Matthews Asia and Neuberger Berman have released some compelling products that advisors are entering.

Harp: With the Fed likely to change its rate hike schedule in 2023, how can advisors adjust their client portfolios?

Rosenbluth: With ETFs, advisors have more control over helping clients achieve their goals. In the year While protection against rising prices will be the focus in 2022, taking a certain amount of risk may be more beneficial. If it involves medium term bond funds Vanguard Medium Term Corporate Bond ETF (VCIT) Or lean toward smaller companies using an equally weighted version of the S&P 500 Invesco S&P 500 Equal Weight Portfolio (RSP)or return to emerging markets with similar products iShares Core MSCI Emerging Markets ETF (IEMG)2023 portfolios may be different from what they did in 2022.

Harp: There are now 3,000 ETFs. How do advisors differentiate the universe of products?

Rosenbluth: Free sites like VettaFi’s ETF Database and others can be a great resource for advisors who know what type of fund they’re looking for, such as short-term bonds or emerging markets, to see what their options are and make side-by-side comparisons. With costs, holdings, returns and more. Consultants may have some home office tools and recommended lists that you can use. Getting the exposure right is very important as what is in the fund will be a greater driver of future returns than the past track record or the client’s fees.

Christmas: The Exchange Summit is coming up in February. Besides learning about ETFs, what can advisors expect from the event?

Rosenbluth: That’s right, the exchange conference in Miami in early February will be a great place for advisors to get up to speed on ETF developments and learn how to be aggressively conservative across a broad portfolio of products. But VettaFi is enabling consultants to build a highly personalized content path for their needs, including practice development and personal growth. This includes hours of continuing education credits, as well as sessions that provide financial planning tools, information on model portfolios, and content marketing. And we’re building in a lot of networking time for advisors to communicate with each other. Exchange It is the position of consultants in February.

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